The U.S. Government Is Bankrupt

By Doug Casey, Casey Research

Everyone knows that the US government is bankrupt and has been for many years. But I thought it might be instructive to see what its current cash-flow situation actually is. At least insofar as it’s possible to get a clear picture.

As you know, the so-called Super Committee recently tried to come up with a plan to cut the deficit by $1.5 trillion and failed completely. To anyone who understands the nature of the political process, the failure was, of course, as predictable as it was shameful. What’s even more shameful, though, is that the sought-after $1.5 trillion cut wasn’t meant to apply to the annual budget but to the total budget of the next 10 years – a fact that is rarely mentioned.

Now whenever the chattering classes talk about cuts, it’s always about cuts over the course of 10 years. Which is a dodge, partly because most of the supposed cuts will be scheduled for the end of the period, but also because new programs, new emergencies and hidden contingencies will creep in to offset any announced cuts. So the numbers below aren’t a worst case; they’re the rosiest possible scenario. People have thought I was joking when, asked how bad the Greater Depression was going to be, I answered that it would be worse than even I thought it would be. But I haven’t been joking.

To sum up the situation, given its financial condition and the political forces working to worsen it, the US government is facing a completely impossible and irremediable situation. I’m going to try to illustrate that here. But because I’m a perpetual optimist, not a gloom-and-doomer, I’m also going to give you solutions to the purely financial problems – albeit with some good news and some bad news. The good news is, there actually are solutions. The bad news is that there is zero chance that any of them will be put into effect.

The problems are one hundred percent caused by the US government, not by bankers, brokers or the real estate industry – although they have been complicit. Recall what government is: an organization with a monopoly of force within a certain geographical area. Its purpose is, ostensibly, to protect the inhabitants of its bailiwick from the initiation of force. That implies three functions: an army to protect against aggressors coming from outside of its borders; police to protect citizens from aggressors inside its borders; and a court system to allow citizens to adjudicate disputes without resorting to force. Assuming you’re going to have a government, it’s important to limit it strictly, lest it get completely out of control – it’s got a monopoly of force, after all – and overwhelm the society it’s supposed to protect.

Here I want you to distinguish government from society. They are not only two totally different things, but are potentially antithetical to each other. This is because the essence of government is force, not voluntary cooperation. Everything that people think the government provides (beyond some forms of protection) is really provided by society or with resources the government has taken from society. It’s critical to understand this, or you won’t see the slippery slope the US is now sliding on.

Is there any chance that the US government can reform and go back to a sustainable basis at this point? I’d say no. Its descent started in earnest with the Spanish-American War in 1898, when it acquired its first foreign possessions (Cuba, the Philippines, Puerto Rico, etc). It accelerated with the advent of the income tax and the Federal Reserve in 1913. It accelerated further with World War I, when the government took over the economy for 18 months. The New Deal and World War II made the state into a permanent major feature in the average American’s life. The Great Society made free food, housing and medical care a feature. The final elimination of any link of the dollar to gold in 1971 ensured ever-increasing levels of currency inflation. The Cold War and a series of undeclared wars (Korea, Viet Nam, Afghanistan and Iraq) cemented the military in place as a permanent focus of the government. And since 9/11, the curve has gone hyperbolic with the War on Terror. It’s been said that war is the health of the state. We have lots more war on the way, and that will expand the state’s spending. But the Greater Depression will be an even bigger drain, and it will likely destroy the middle class as an unwelcome bonus.

In all that time, from 1898 to today, there have been no substantial retrenchments of the US government, and the situation is getting worse, on a hyperbolic curve. Trends in motion tend to stay in motion until a genuine crisis changes them, and this trend has been gaining momentum for over a century.

Let’s divide people into three classes – rich, poor and middle class. Rich people are going to be okay. They can bribe the politicians to change the laws, hire the lawyers to interpret the laws, the accountants to limit their liabilities, advisors to help them profit from distortions and travel agents to get them out of Dodge. They may get eaten later, but for the moment, don’t worry about them.

The poor don’t have much to lose, and the government is going to keep throwing benefits at them to keep them happy. That’s a shame because it cements them to the bottom as poor people – but that’s a topic for another day.

The real danger is to the middle class, and it’s a serious matter because the US is a middle-class society. These are people who try to produce more than they consume and save the difference in order to grow wealthier. That formula has worked well up to now – but almost everybody saves dollars. What happens, however, if the dollars are destroyed? It means that most of what they saved disappears, and most of the middle class will disappear with it, at least for that generation. They’ll be very unhappy, and they’ll be up for some serious changes. I’ll come back to those later.

The Budget

Take a look at the following pie chart of US government spending. It’s cut into 10 slices, by function. The government used to break down and report its spending according to agencies – Defense Department, so much; Department of Agriculture, this much; FTC, that much. They’ve de-emphasized that and now seem to prefer reporting by function, because most of the agencies do many things. Actually, with thousands of agencies, departments, divisions, bureaus, units and contractors, it’s impossible to figure out exactly who does what in the government. It’s so large, so irresponsible and so unmanageable that the only solution is to abolish things wholesale. Bureaucracy naturally grows unless it’s pulled out by the roots; reform, or pruning it back, is doomed to failure.


The chart shows a tiny little yellow sliver, 2% of the pie, equaling $55 billion, for administration of justice. That’s the police and the courts – by far government’s most important functions, but also by far its smallest expenditure. That’s a lot of money, but how much of it is really necessary? Of the 2.3 million people currently incarcerated and the tens of millions more who are ex-convicts, parolees or otherwise “in the system,” most are there because of victimless crimes, mainly drugs. In the Constitution, only three federal crimes are mentioned – counterfeiting, piracy and treason. Dope isn’t there. Now there are over 5,000 categories of federal crime. Most of them should be abandoned to the states. So the most important function of the federal government could be cut back hugely.


This is the red chunk, 24%, equaling about $850 billion. The very title of this part of the budget is an Orwellian misnomer. Until 1946, there was a War Department (for declared wars) and the Department of the Navy (for miscellaneous foreign adventures). Regrettably, the Defense Department doesn’t defend the US so much as its own budget. By having troops all over the world, they’re actually attracting danger to the US. As you know, the US spends more on so-called defense than the rest of the world combined; in effect, it’s bought a gold-plated hammer that makes everything start to look like a nail. Are there dangers in the world, and bad people? Absolutely. But bankrupting yourself while developing new enemies isn’t an optimal response.

A bit of perspective is in order. World War II, by far the biggest war in history, is said to have cost 288 billion 1940 dollars. Today that’s only a third of TARP. Of course, those were 1940 dollars, equal to perhaps about 4.1 trillion of today’s units. One other thought about the military budget and where it’s going: You may recall that, for a while after the Soviet Union collapsed, there was talk about a “peace dividend” of $50 billion. It seemed like a lot of money at the time, but it evaporated like water on a hot skillet.

Americans seem to love their military, if only because it’s a part of the government that seems to work (at least when cost is no object), and it doesn’t seem corrupt (at least below the level of the Pentagon). They’ll be loath to cut military spending and hard pressed to do so with new wars clearly on the way. So it’s likely to grow. That said, 90% of this piece of the pie should be eliminated before it’s too late.

Social Security

This is the big blue chunk, at 20%, for about $706 billion. People who receive it don’t like to hear this, but Social Security is a classic Ponzi scheme, where late entrants are essential to pay early entrants. But it’s worse than a Ponzi scheme because it’s involuntary. It’s justified by alleging “it’s for their own good.” But that’s a lie, because it actually discourages saving on the part of the poor in two ways. First, it makes many believe saving is unnecessary because they figure they’ll have Social Security to rely on when they’re old. Second, it takes 6.2% off the top of an employee’s pay, plus another 6.2% from his employer, up to $106,800 of earnings. That’s over $13,000 every year that can’t be saved. Further, it doesn’t go into some mythical “lock box.” It goes into the government’s general revenue, and payments come out of general revenue. It’s not somehow “set aside” anymore, as was once the case, when it went to buy a special class of government bonds. Even when that was the case, it was a fraud. Those bonds never represented savings; they just represented future tax revenues that would need to be extracted from future generations.

If the government insisted on making citizens save – itself a bad idea that I don’t have space to dissect here – it should be in the form of an individually owned IRA. Chile has had these for 30 years, and as a result today the average Chilean has more net wealth than the average American. They have real assets in the form of shares, not a liability in the form of government debt.

What, then, is going to happen to Social Security? Right now, 12% of the US population are 65 or over, therefore eligible for Social Security. By 2030, that number is going to rise to 23%; about two workers will be supporting each retiree. That’s probably impossible, but I doubt we’ll have to confront the eventuality because the system is unlikely to last that long. It’s a real time bomb, however, because few Americans any longer have sufficient savings to support them in their dotage. So don’t look for any cuts here. It’s become an insoluble problem.

Income security

This next-biggest item equals $624 billion, for 17% of the budget. It’s a catchall of many different programs from many different agencies that could more accurately be termed “welfare spending.” It includes food stamps for over 45 million. Unemployment benefits for perhaps 12 million more. Housing assistance for millions more. Pensions for federal employees and a myriad of other welfare benefits.

Can much of this $624 billion be cut? I would say it should be cut to zero. It’s a morally corrupting influence and a financially bankrupting one. But because unemployment is going much higher and the standard of living is going much lower, there’s not much chance of any cuts here. People now fervently believe this is what government is for – entirely apart from the fact that the unemployed and the poor are voters.


At $451 billion, 13% of the budget, this item is growing the most rapidly. What should happen to Medicare? The answer, of course, is that it was the height of hubris and stupidity for the government to have created this cancerous monster – but that doesn’t address the current issue. This isn’t a question that lends itself to a technocrat’s answer; even more than other categories of spending, it’s a philosophical proposition. Let’s address it from that direction.

What, historically, have men done upon reaching a certain age, when the body starts to desert you and you become an active liability to your fellows as well as to yourself? In pre-industrial cultures, the honorable course was to wander out into the wilderness (while you were still able), make your peace with reality and die. Eskimos would step out onto an ice floe and disappear. An especially loved or valuable person would be cared for – a good incentive to be loved and of value. Only a coward, a degraded and despicable person, would attempt to hold on to life at the active expense of others.

Of course we now live in relatively rich industrial cultures. But, I submit, the moral principles are the same. We now have savings, and if you save up enough, and if you want to dissipate your assets by putting yourself in a hospital bed, surrounded by strangers, with a tube up your nose for ten years before you kick the bucket – it’s your money. But you certainly shouldn’t require other people to do that for you – which is what Medicare is about.

The answer is to take care of yourself. If you think advances in technology can keep you alive to age 200, save the money to pay for it. Assuming you don’t care enough for your progeny to leave them anything.

As with Social Security, the demographics for Medicare are disastrous. Again, 12% of the population now is over 65, but by 2030 it will be 23%, so, everything being equal, spending is going vastly higher. But it’s much worse than that because of skyrocketing medical costs. Note that there is no necessity, in a free market, for medical costs to rise. Rather, they should be expected to fall, like the cost of most technology. But as medicine becomes ever more regulated and (theoretically) available to everyone, just the opposite will happen. This is one reason the FDA should be renamed the Federal Death Authority. By raising the prices of new drugs and devices literally tenfold, it probably kills more people every year than the Defense Department does in a decade.


At $369 billion, 10% of spending, this is another Orwellian misnomer. People are, understandably, willing to pay most anything to preserve their health. But the government’s spending has almost zero to do with health. Health is something you and only you are responsible for. You maintain it by proper diet, exercise and general lifestyle – plus a dollop of good genes. It’s inaccurate and deceptive to call medical care health care. Medical care is needed for emergencies, but it’s a poor substitute for health care.

So where does all this money go? Part of it is Medicaid, for people too young to qualify for Medicare and too poor to pay their own bills. Many are the morbidly obese types you’ve seen fighting for bargains at the Black Friday sales at Walmart. Some funds go to buy a scooter for an oldster – you’ve seen the ads on TV, an excellent scam for the companies marketing them. If health is what is wanted, the answer lies partly in abolishing public housing and food stamps; some people might actually go out and exercise. The whole thing is corrupt from top to bottom.

Where is this item going? If Obamacare goes into effect, vastly higher. Medicare and Medicaid are exact templates for Obamacare.

Education, training and social services

Here we have $125 billion, but that’s only 3% of the budget. Most of it is direct school expenditures and school subsidies. Of course education is a good thing, but I don’t feel out of line saying that most government schooling amounts to indoctrination – or just day care. It should be abolished and education left to parents (who are more interested in their kids than any bureaucrat) and to communities, churches and entrepreneurs.

Much of the money is for higher education, most of which is doled out in places where kids go to misallocate four to six years of time, pick up bad habits, acquire destructive notions from professors and incur a pile of debt that they can’t get rid of. Between the bad ideas and the debt, they graduate as serfs – psychologically from their classes, financially from having to pay for the experience. Education, like health, is something every individual must acquire on his own; throwing other people’s money at schools to keep kids sitting at desks is counterproductive. Taking a hard science, math, medicine or engineering course in school is one thing; taking courses in political science, English and gender studies is something else. 90% of the universities and colleges in the US should, and would, go bankrupt without federal aid. But since it’s anathema to cut education funding, there’s no help from this quarter.


$92 billion per year, 3% of the budget, is a lot to spend for highways that are falling apart; the interstate highway system should be privatized and run as toll roads. The government railroads, Amtrak and Conrail, are disasters; they, too, should be privatized. Air traffic control, which the FAA provides with technology from the ’50s, should be the province of the airlines or of privately owned airports.

The TSA is part of this slice, and it’s expanding. It now has sixty thousand employees providing “security theater” not just at airports but bus stations, highways and NFL football games, where you have to be examined at the gate.

General government

Note the violet slice labeled “other,” for $119 billion, or 3% of the budget. This catchall includes general science, space and technology, natural resources, environment, agriculture, community and regional development. Other than the police agencies, the military and the courts, this category encompasses most of the government’s traditional – which is not to imply necessary – functions and services.

Let’s look at a few random items, mostly for amusement, since it would take a large book to even summarize the government’s budget. It’s a vast array of miscellany, including flood insurance nobody else will sell you because you chose to build your house on a flood plain. It encompasses the $2.7 billion Bureau of Indian Affairs, which has forever been the most corrupt agency in the government but still exists 125 years after the frontier was closed. It includes the FCC, with its $1.2 billion budget (a trivial cost relative to the economic distortions it pays for). Although the agency serves no useful purpose, its average employee makes $147,000 per year; but then the average government employee makes $74,311 per year, which itself is 40% more than the average private-sector employee. The FDIC, which provides stickers on bank doors to bolster confidence in failed institutions, has $3 billion of assets left to insure over a trillion dollars in deposits.

The General Government slice also includes the national parks and administration of the roughly one-third of the US that is directly owned by the US government. Of course all that should be privatized; it’s dead capital. The US government should not be in the real-estate business or any other business – like the Post Office, which currently runs an $8 billion annual deficit. Perhaps some of its employees would “go postal” if its assets were sold off, but many would qualify for a job at FedEx or UPS. It includes NASA, which has devolved into just another turf-protecting bureaucracy, slowing down the development of the private space industry. It should be sold; I doubt they could get much for it, but that beats a $14 billion expenditure every year.


The US government made net interest payments of $196 billion, for only 5% of the budget. It seems like a reasonable enough figure, financing so many laudable projects, and small by comparison to other categories. As I’ve indicated above, the other categories of spending are likely to grow – but interest will explode. I expect, in the next few years, it will become by far the largest category of spending, possibly larger than the next two largest put together, even while most of the others grow like cancers.

The reason is simple. Right now interest rates are at extremely low levels. That’s partly because few people want to borrow in today’s uncertain climate. But it’s also because rates are being suppressed by the government. They want to “stimulate” the economy with low rates – so people can borrow more and they can avoid default for a while longer. And the US government is itself, by far, the world’s largest debtor. They have $15 trillion in official national debt, on which they are paying $200 billion per year in interest. Most of that debt is short term, with less than a year to maturity. At some point very soon, they won’t be able to roll over most of that $15 trillion, in addition to floating $1.5 trillion of new debt incurred each year, at anywhere near current interest rates.

At some point, we’ll see rates go to the levels of the early ’80s, when The Long Boom started. And probably even much higher. But even at 12%, the interest cost alone would be $1.8 trillion per year – a completely unbearable amount. But it’s also both inevitable and imminent.

As unnecessary, corrupt and destructive as almost all of the federal budget is, I suppose the government could get by for a good number of years to come, on some basis. As Adam Smith accurately put it, there’s a lot of ruin in a nation. But as the current financial crisis in Europe is illustrating, debt can bring it all to a head very quickly. The US is only slightly behind the Europeans. The same is true of China and even truer of Japan.


My point is to make it very apparent that there really is no conventional solution to the US government’s financial crisis. It’s reached a stage where the government will have to start defaulting on some of its obligations. You decide which. The only questions are political; the economics are quite clear. Nothing will be done, as the Super Committee showed. I believe they would have done something if they thought it possible and knew how.

Actually, the situation is much more serious than what I’ve briefly illustrated. We’ve only discussed one aspect of the income statement, which itself is enough to bring down the whole structure, and soon. We haven’t discussed the government’s balance sheet. Estimates vary, but the US government has direct and contingent obligations that go far beyond its $15 trillion in accumulated borrowing. The present value of its Medicaid, Medicare, Social Security, veterans, financial insurance and numerous unfunded liabilities might be another $200 trillion. Nobody knows, and it’s probably impossible to calculate.

So, the US government will go bankrupt. That’s not the end of the world. Lots of governments have gone bankrupt, some of them numerous times – like almost all of them here in South America, where I am at the moment.

In fact, there’s a temptation to look forward to it eagerly. After all, the state is the enemy of any decent human. One might hope that when they bankrupt themselves, maybe we will get to live in a libertarian paradise. But that’s not likely the way things will come down; rather, just the opposite. Not all state bankruptcies are just temporary upsets. Most of the great revolutions in history have financial roots. Great revolutions are more than just unpleasant and inconvenient; they’re extremely dangerous.

The French Revolution of 1789 was brought on by the financial collapse of the French government. It was a good thing to depose Louis XVI, but things didn’t get better – they got much, much worse with Robespierre and then Napoleon. In Germany, the destruction of the German mark in 1923 set the stage for the Nazis – and then the Depression ushered them in. The collapse of the Czar’s regime in Russia in 1917 seemed to be good news at first – but then things got worse, and they stayed worse for a long time.

The fact is that when a government collapses, especially when the government is providing all the things the US government does today, people want somebody to fix it; they want their goodies back. It’s well known that over 50% of the US population are net recipients of state largess. And the degree of state support and involvement in the US is far, far greater than it was in France, Russia or Germany. After a period of chaos, it’s always the people who are most political, who have the most rabid statist ideas who get the public’s attention and rise to the top.

It seems highly likely that the US will get a savior, someone full of bravado, who assures the booboisie that he can straighten things out – if he is given sufficient power. Perhaps it will be an arrogant windbag like Gingrich, perhaps some general. The government won’t wither away; it will reassert itself. I don’t see any way around it, actually. We are already moving into a police state (evidenced most recently by the Senate’s Nov. 2 vote allowing the military to indefinitely incarcerate anyone they accuse of terrorism). But at least it’s a police state with a fairly high standard of living, one with Walmarts, McDonalds, and SUVs – at least for the time being.

But rest assured that if the situation evolves the way I expect, the standard of living will drop steeply, financial markets are going to become chaotic and the US will become a quite repressive place for some time – at least as long as the War on Terror lasts. I will bet you money on this. In fact, I am betting money on it.

So what can you do about it? Well, actually, there is nothing you can do about it. At least as far as changing the course of history is concerned. The best you can do is to speculate intelligently on further, new distortions that will be cranked into the system, as well as others that are inevitably going to be liquidated.

It seems to me that this is a trend that can no longer be turned around. The US government’s budget is, in fact, the biggest thing in the world; it won’t be turned around, because it is like a gigantic snowball rolling down a hill. It will only stop when it smashes into the village at the bottom of the valley. The best thing you can do is capitalize on it as well as you can and get out of its way while you do.

[If Doug is right and this trend cannot be reversed, the time to start preparing for what’s ahead is right now. This free investor briefing will help you get started.]

Economic Insights from a Lord of Finance

By David Galland, The Casey Report

Of all the social memes related to the economic and investment landscape, none is more dominant than that there is a small cadre of powerful Wall Street money men who, working behind the scenes, effectively control investment markets, the global economy and the politicians that play such a big role in that economy.

Whether you call them fat cats, greedy bankers, soulless manipulators or unindicted co-conspirators, the one sure thing, in the minds of most, is that they wield the power behind all thrones and that it is their whispered agreements, invariably made in darkened rooms full of cigar smoke, that decide the economic fates of us all.

Over the years, I have met quite a few of these “Lords of Finance” and found them to possess the same wide range of traits, positive and negative, shared by all humans: fear, insecurities, self-delusion, high hopes, good intentions, social aspirations, good habits and bad.

And, of course, the greed that the Lords of Finance are said to possess in extra doses. Like Gordon Gekko, I have no problem with greed, as long as the pursuit of that which gives you pleasure does no harm to others. 

There is one trait, however, that, in my experience, is almost always present in a Lord of Finance – and that is an acute intelligence. When it comes to matters of finance, even the average Lord of Finance has a keenly honed mind that has been trained to precision to understand the complex pieces of investment markets.

Which brings me to my interview. We’ll call him LOF, because the only way he would agree to be interviewed was if it was anonymous. A former colleague of a friend of mine, his career on Wall Street has stretched over 40 years and includes 10 years as the chief financial officer for one of the world’s most powerful investment banks. Leaving that position to strike out on his own, he and a group of colleagues went into money management, overseeing billions of dollars. Now, slowing down in the latter years of his career, he and his colleagues manage “only” tens of millions.

My goal for the interview was two-fold. First, it is to help calibrate our own views on the outlook for the economy with an individual who is not just hyper-intelligent but who has spent a lifetime immersed in the money game at the very highest levels. Casey Research sees ongoing crisis, getting far worse before it gets better. But what about a Lord of Finance?

Secondly, I wanted to gain some insights into the rarified world inhabited by the Lords of Finance. Is their dismal reputation warranted, or are they just people whose education and professional instincts have taken them to the top of highly rewarding and highly influential careers?

Let’s find out.

DAVID: People have a lot of perceptions about the “Lords of Finance,” if you will – the big banks, the operations in New York, the political connections and so forth. As you worked in the executive suite of one of the largest and most influential of these institutions for a long time, I want to get your take on those perceptions and also see how well our views on the current economic situation sync up, or not.

LOF: This is totally anonymous, right?

DAVID: Yes, completely anonymous.

LOF: Okay, great.

DAVID: So as a background, the first question, how long have you worked in the financial industry, what did you work in, and what sort of capacities?

LOF: Right. Well, I guess it started in the mid-60s, so I’ve been in the business now for 45 years. It is hard to believe, and the first 25 or so, really the first 30, I guess, were with a major investment bank that will go unnamed, rising to the position of chief financial officer.

Since retiring, I was involved with a firm managing billions of dollars. So, in answer to your question, most of my career has been with a big bank, but I have also run my own money management business. I am also a CPA, having started with a big CPA firm back in the early ’60s.

DAVID: Right. So 40-plus years in the business.

LOF: Correct.

DAVID: In all that time, have you ever experienced anything in the markets and the economy similar to what’s going on today?

LOF: No. In my experience, this is unique. And I remain concerned about the potential for another serious crisis. And for the first time, I’m concerned as to whether or not the American economy really has the kind of robust characteristics that we have enjoyed for most of my life and most of our careers, which is something quite new to me.

DAVID: So you aren’t buying the story that we’re out of the worst of this and that it’s happy days from here?

LOF: No, I certainly don’t buy that story.

DAVID: How would you describe the current state of the big financial houses? Does the fact that they’re still laying off thousands of people suggest these firms are hunkering down for a protracted period of slow growth?

LOF: Yes, I’m sure that’s what they’re doing. I think they’re also in an environment that is extremely uncertain, looked at from their point of view. You have a public that is still angry at them, for good reason, for their culpability in what happened in 2008 and 2009 and continues to happen.

Then you’ve got a regulatory bill, this Dodd-Frank bill, which has really yet to evolve because so many regulations have yet to be written by the various agencies. So the banks really don’t know what the landscape is going to look like going forward, and that makes it very difficult to plan, especially when it’s clear that the appetite is for more stringent regulations and not less.

Another aspect is that the environment in which they were able to make so much money by using tremendous leverage has certainly changed. It is highly questionable whether they can do that sort of business again, given that the balance sheets of these big banks are so opaque and so difficult to manage. So much so that I question whether any outside regulator can decipher and understand the risks that these banks have been taking. Actually, I question whether the banks themselves understand the risks that they’re taking. I think there are so many interactions that I have to wonder whether anybody really understands the kinds of risks that are out there. All of which adds up to a very challenging environment for these banks to operate in.

DAVID: Speaking of uncertainty, Dodd-Frank contains something like 400 new rules the banks are going to have to comply with, most of which have yet to be implemented. That would support your contention that it’s going to be very hard to plan in that kind of environment. Especially because some of the new legislation strikes right at the heart of key lines of their businesses – lines that have gone away and are unlikely to return anytime soon. So that’s got to really add some pressure.

But actions speak louder than words. Knowing everything you know about the big financial houses, would you invest in one today?

LOF: I would not. The way I look at the world as an investor today is very different than the way I looked at it in 2007. With hindsight, I now know that I was taking much too much risk in 2007, and part of that risk was in financial companies. I have significantly reduced that risk to a very, very small fraction of my own investment portfolio.

I think that it’s a fool’s game to invest in those banks, because there is so much uncertainty out there, in terms of the new rules and regulations, and also there is far too much risk embedded in these companies.

DAVID: Are you referring to derivatives?

LOF: Derivatives are certainly part of it, but it comes down to the exposure these companies have to other financial institutions. The interrelationships are immense, and the credit of each of these institutions is uncertain and hard to evaluate.

Let’s put it this way, they’re not doing business with the Procter & Gambles of the world, businesses you can do a fairly straightforward evaluation on. I no longer understand the complex interrelationships of the institutions. If I ever did, I no longer do. And I don’t like to invest in things I don’t understand, certainly not in size, so I’m uncomfortable with these institutions as an investor. For that matter, I would be uncomfortable as a regulator, and I would be uncomfortable as a customer.

DAVID: To many people, the “fat cat” bankers on Wall Street are viewed as the very epitome of unchecked greed, avarice, even evil. As you were part of that world for a long time, how would you respond – is the poor image warranted? Do you think the culture in the big institutions has changed over the years since you retired?

LOF: Most of the people I worked with on Wall Street were good people – well meaning, ambitious, but with a very strong moral compass. I suspect that is still true today.

I do think that the culture has changed… in one important respect. For many, many years – including when I worked there – Wall Street was dominated by large partnerships. The partners had every nickel they had – both in the firm and outside the firm – at risk, even their homes and cars. I was stopped frequently by partners who worried incessantly about too much risk threatening their financial well-being.

We weren’t permitted to take much of our capital out of the firm, and withdrawals were tightly monitored. Why? To reinforce the feeling that all we had was at stake and to encourage modest risk taking as opposed to “betting the ranch.”

That all changed once firms went public and partners were able to have large stakes outside the firm and achieve “limited liability.” It became “other people’s money.” A huge difference, I think, and one that contributed to a much greater willingness to do things that wouldn’t have been done in an earlier era.

A second factor was the elimination of Glass-Steagall, which had previously kept activities within bounds. Once that was eliminated, banks and brokerages were able to greatly expand their risk taking –without the capital necessary for such risk taking. And, in many cases, beyond the managerial expertise of any firm as well as the expertise of the regulators, because their activities became too complicated for mere mortals to understand.

DAVID: The news broke recently that the government is preparing to launch a new wave of lawsuits against the big banks over their mortgage lending practices. Do you get a sense that the honeymoon is over between the government and the big banks?

The average guy on the street looks at the big banks and the rotating door between the banks and government and thinks, “Well, these guys are all in the same bed.” Is that an accurate assessment of the way things have been, and if so, do you think that cozy relationship is now changing?

LOF: Well, it’s been pretty stunning how, on a number of fronts, the banks have gotten away with as much as they’ve gotten away with. That does suggest that there is this unholy alliance between the people that write the rules and the people that benefit or suffer from those rules, aside from the average person on the street, that is.

You’re right, that’s the perception, and I think it’s accurate given that nobody has gone to jail. Considering what’s happened, it’s amazing that that’s the case and suggests that corruption in the political process played a role in what happened. But that may be changing.

The elections of 2010 and perhaps the election of 2012 are putting a lot of people in office that are not beholden to the big financial institutions in the same way as was the case in 2008. That said, that’s not necessarily good. I mean it’s good in a sense, but at the same time, when you have the attitude out there that it’s the government against the banks, that’s not healthy for the economy either. It’s too early to say how all that will play out, you know, on a bottom-line basis.

DAVID: Based on your observations, do you think the banks were deceitful in how they marketed overrated mortgage-backed securities, or were they just blindly opportunistic in going along with the flow?

LOF: Have they been deceitful? I don’t really have an opinion on that, but I will say that the big problem in 2008 and 2009 was in the excessive overleveraging of these institutions and the amount of risk that they took on. The fact that they weren’t as candid as you would like them to be in terms of what they said about what they created and what they sold – I think that’s pretty much always been out there, but most of the people on the other side of these trades were pretty sophisticated people.

So I guess you can say that it was a caveat emptor kind of situation. In my view, it was the scale of what they were doing, the immense leverage that was embedded in the system, that was more of a problem than whether they were deceitful or not.

DAVID: Has the leverage been markedly reduced at this point?

LOF: You know, I haven’t studied it, so I can’t tell you that I know. I believe it has been reduced, but by how much, I really couldn’t say. Whether it’s been reduced enough and whether there’s enough capital in the system to cover the risk, who can say?

One of the things that’s sort of interesting to me is that Warren Buffett invested five billion dollars in Goldman Sachs back in 2008, and that gave a lot of confidence to others that somebody like Buffett would put five billion dollars in even though the capital was pretty expensive. And then, within a couple of years, they pay it back, which makes me question why they would have taken Buffett’s money in the first place.

I mean, it’s nice capital, and yes, it costs a little bit more, and maybe the reputational aspect of having Buffett as one of your investors was important at the time, and so you take the capital and then pay it back, but that doesn’t make a lot of sense to me. Then, recently, Buffett goes to Bank of America and offers them five billion dollars and they take it, but at the same time they’re saying they don’t need the capital, so it’s confusing.

Do they or don’t they need the capital? I’m not sure they know. I’m not sure anybody knows what kind of capital needs they have. Again, it gets back to my point as to how much they really understand their own businesses anymore, and the risks that are there and the amount of capital that they need.

If the companies themselves don’t understand it, how do you expect those people that are overseeing them to understand it? Bottom line, I question whether there’s enough capital in the system for the risk that is being taken, even today.

DAVID: Which begs the question that if another big bank runs into serious trouble, and Bank of America seems like a good candidate, do you think there’s an appetite in Washington to arrange another bailout? Of course, the consequences of not bailing them out are pretty significant.

LOF: I don’t think there is an appetite for more bailouts. You can see that by looking at what’s happening in Europe.

The question of what to do with banks and what to do with the problems they could create for the economy if you let them go is being grappled with worldwide. I think the only hope the policy makers have is that these problems will be solved through growth, as that is the only rational solution.

Which means the real question is whether or not that growth will occur in a reasonable time period. Frankly, it is hard to see where that growth is going to come from. It is certainly hard to see that in Europe, and it is hard to see that here in the US as well.

DAVID: On the topic of growth and trying to get money in the system, you’re a financial guy, so maybe you can explain the tremendous amount of money sitting on deposit at the Fed earning almost no interest, but enough, apparently, to keep the banks from lending that money back into the economy.

Do you have any thoughts about why the Fed is paying interest rates on the deposits and why the banks are leaving that money on deposit? It’s unprecedented as far as I’m aware. Any thoughts on that?

LOF: You’re right, there is a tremendous amount of money that is not being employed in the economy, and it’s all part of the same problem. And that problem is that the banks don’t have any confidence, companies don’t have any confidence, outside investors don’t have any confidence. Everybody is frightened, and everybody is trying to protect themselves. That is not an environment that produces growth.

DAVID: So they are leaving the money on deposit at the Fed because they’re not sure about their capital needs? What if the Fed were to go back to paying them nothing on their excess reserves, or actually start charging them to keep the money parked at the Fed? Wouldn’t that help push that money back out into the economy?

LOF: All these potential decisions by the Fed have consequences that neither they nor anybody else can anticipate. What you’re suggesting might work out, but I don’t think anybody knows. I don’t pretend in any way to have opinions as to what the Fed should or should not do. It’s not something I study. It’s not something I understand, particularly.

Instead, I try to approach these sort of things as a businessman or as an investor. And as a businessman and as an investor, I look around and see a lot of uncertainty, I see real potential for crisis. And when I see that, I just want to hunker down in some way, and that attitude influences every decision I make.

As I’ve mentioned before, since 2007 I’ve changed the way I think about things. As a result, for the last four years I’ve been working to position myself and my family in a way that I believe is more sensible. Becoming far more cautious could be the right thing to do or it could be wrong, but however you look at it, when you extrapolate that shift in attitude across millions of investors and business owners and even bankers who have been acting much the same way, it is not a positive for the economy. I guess that wasn’t a specific answer to your question, but…

DAVID: No, it makes sense that this widespread reaction to uncertainty is a fundamental force in today’s economy and investment markets. Any thoughts on interest rates? It seems odd that the US government could have record levels of debt and continue to run record deficits and yet interest rates bump along at record lows. Does that make sense to you?

LOF: Actually, it has made sense to me. I have felt for some time that the people, including Bill Gross, who I think is great, who have been saying that interest rates and inflation are heading higher, although probably right in the long term, were not going to be right in the short term, and that the short term has a ways to go. Specifically, I have felt for some time that interest rates were headed lower, and I continue to believe that we could easily see 1.5% on the 10-year Treasury and somewhere in the 2s for the 30-year.

My rationale is that there are such tremendous headwinds preventing the economy from growing in any significant way, and it will probably be contracting, and those conditions are not going to produce rising interest rates. Quite the opposite. The headwinds are all the things that we’ve talked about, plus you’ve got this dramatic entitlement problem in our country and in Europe that is only going to grow more problematic.

If you go back in history and look at the ability of a democratically elected government to take things away from people who vote, the record is pretty clear. Predictably, if you’ve given people something significant, and then you try to take it away and they vote, the politicians will be voted out. So whether it’s right or it’s wrong, the populace in general will not stand for it, so therefore the politicians will avoid taking the hard measures that could actually help solve the problem.

Historically the only way to resolve the sort of problems we’re facing is through growth, and if you don’t get growth, then the policy makers will continue to debase the currency.

Ultimately that will happen, but in the period of time that I can foresee, which is the next three or four years, I don’t see much of a chance that interest rates will go up. I think there is a very, very strong downward pressure on interest rates that will continue for a while.

DAVID: Obviously, the uncertainty will keep people looking for those safe harbors, and Treasuries are still considered safe harbors. The other thing that sort of strikes me as a factor now is the dismal shape of the Eurozone. I have to imagine that there is an awful lot of money currently in the Eurozone that would like to get out of there and is starting to move out. Of course, US Treasuries are one of the few instruments that can actually handle any kind of real volume, so that will probably help keep rates down as well.

LOF: Absolutely. I think that’s absolutely true.

DAVID: You seem to be expecting short-term deflation, longer-term inflation, would that be a good way to describe it?

LOF: It’s pretty hard to create a scenario where you don’t have inflation in the long run, but what the long run is, is another question, and the long run could be quite a ways out.

Let me add that I am more positive about the future than I may otherwise sound. I think that the American economy, in particular, has resilience that is pretty impressive, and that ultimately we are going to get through this. But I think it’s going to be a very, very long period of time before that happens; it could easily be five to ten years.

When we do come through it, I think the economy will have a vibrancy that people won’t expect, but it’s going to be a while, and at that point, I think we’re going to have to deal with some serious inflationary pressures.

DAVID: Given the obligations and the entitlements and the current level of debt and no end in sight to the trillion-dollar-plus deficits, it seems to me that this is not going to end without some sort of default, either overt or covert in terms of inflation. If for no other reason than that these obligations can’t be met. Would you agree with that?

LOF: Yes, I don’t think they can be met. I think it’s impossible. I think they have to be restructured in some way. You’ve got to restructure the whole entitlement system, and politically you can’t do that right now.

I recently had a conversation with the economist at a major bank, and I asked him what he thought. I said, “What do you think the chances are of another crisis of the magnitude or greater that we had in 2008 and 2009, and if that crisis occurs, when would it occur?”

He said he thought that there was a real chance of that happening, and if it happened, it would probably happen sometime after the election in 2012 when the markets realize that even in a new administration, these problems will not be dealt with.

In his view, once the markets understood that, we are likely to see a very, very bad crisis. Then, just maybe, at that point will the political process make the necessary adjustments. But I think that even that’s questionable.

DAVID: I just finished an article for John Mauldin’s newsletter, in which I looked back at all the times the US monetary system was in danger of failing and had to be fixed.

As it’s been 40 years since the last major do-over of the monetary system – when Nixon closed the gold window – most people think of the monetary system as being fixed in stone, and the notion of it stumbling doesn’t even come up in the average conversation. But in reality, it has been restructured numerous times since the Civil War.

In our view, the current fiat system is not going to make it to the other end of this crisis intact, but will have to be remade in some way that anchors money to commodities, with gold at the core.

How do you and your friends in high finance view gold these days? Do they still view it as a barbarous relic, as they did a few years ago? Are they starting to buy it for their portfolios? Personally?

LOF: I think that more and more of what you might call respectable opinion puts gold in a different category than they would have five years ago. You hear an increasing number of serious commentators, people like Byron Wien, for example, talking about having a 5% position in gold, and you never would have heard that five years ago.

Back then, favorable opinions on gold would have been seen as far out. Today having a significant gold holding is more and more in tune with respectable opinion than it ever was. The mainstream guys are also thinking in terms of things like TIPS and in terms of holding other currencies.

In other words, they’re investing in things that they never would have thought of doing before this crisis, but gold in particular. And not so much as a commodity but as a currency. That’s been my view for some time, but now I am hearing that same view on a much broader basis.

DAVID: So I take it you have been buying gold personally?

LOF: I have.

DAVID: Starting when, more or less?

LOF: Well, I’ve had a gold position for 20 years in gold coins, and then in the last three years I’ve been adding to that through ETFs.

DAVID: What percentage of your portfolio, more or less, would you say is now in gold?

LOF: It’s probably 3% or 4%, but it probably should be higher.

DAVID: Moving along, it’s safe to assume you’re pretty well off financially. What did you think of Buffett’s call that the government should be taxing the rich more?

LOF: I have what you may find an interesting point of view on that. I do think that inequality is a bad thing, and it is something that causes political unrest. Being a dedicated Republican, as much as I dislike this administration, I would have to believe that if there were a Republican administration in place and we had this kind of an economy, you could easily see a lot more political unrest in the street than you do right now.

Now ask yourself what Buffett and people at that level of wealth are afraid of… I can tell you they are not afraid of much – if you have whatever he has, 50 billion dollars, you’re pretty well set. The real fear people like that have is social unrest, and so maybe what he’s doing is trying to appease the masses by virtue of saying he should be taxed more, even though that’s not going to make any kind of a dent in his net worth.

So it’s an appeasement thing, and I understand why he’s doing it, but I don’t think it works. I don’t think it appeases anyone, and I don’t think it does anything to redress the inequality problem that’s out there. That’s a very, very great fear that people with money have, of social unrest on the home front.

DAVID: Do you anticipate your taxes going up, a little or a lot?

LOF: I think you have to assume that over time they will go up a lot. Whether or not that happens in a short time frame or a long time frame, I think the political pressures ensure it. If 50% of the people don’t pay any taxes and they’re voters, then that has to be the direction we are heading. As much as I don’t think that will be good for the economy, and I certainly don’t think that it will be good for me, I think it’s pretty hard to resist the reality.

DAVID: Other than gold, what else are you investing in these days? Are you heavy in cash?

LOF: Yes, I’m more heavy in cash than I ever was. I still have an allocation to municipal bonds where I keep the duration relatively low. I have an allocation to common stocks of companies providing consumer staples, the Procter & Gambles and the Kimberly Clarks and the Johnson & Johnsons of the world. Companies that are in better financial shape probably than the US government and that pay dividends of 3% or so.

I have an allocation to hedge funds run by very smart people who can do things and think things out in ways that surpass my level of confidence in doing it myself.

I have an allocation to convertible bonds, convertible bonds of companies where you keep the duration short, and you believe that they’ll still have a pulse a few years down the road, so you’re going to at least get your interest on the bond if you’re wrong and if the stocks don’t perform.

As I mentioned, I’ve got an allocation in gold and in TIPS. And I also believe in having money in private equity. I do believe if you want to take risk, put some money with a manager who is putting his money to work side by side with yours, watching for opportune situations, taking advantage of the dislocations that exist, and doesn’t have a liquidity issue where investors have the ability to pull their money out whenever they get nervous. I think that is a very sound place to have an allocation to.

DAVID: To give us some sense of how concerned you are about things at this point, what percentage of your portfolio is in cash?

LOF: About 10%.

DAVID: That’s all, so you haven’t completely run to cover?

LOF: I consider my municipal portfolio, which is pretty short term and is maybe another 15% or so, and my convertible portfolio and my portfolio of consumer staples as all being things that constitute my safety net. If you add all those together, it’s probably close to 40% to 50% of my portfolio, So, yes, it’s not all cash, but it’s, you know, at least in the categories that I feel comfortable with.

DAVID: Wrapping up, looking over, let’s say, the next five years, on a scale from 1-10 with 1 being everything is going to be okay and 10 being something closer to Doug Casey’s view that “people will be grubbing for roots and berries,” where would you put yourself?

LOF: The next five years: 1 is hunky dory and 10 is Doug?


LOF: I guess I’d be a 6. I mean, I think that we’re not going to be fighting in the streets and having to use our gold and silver coins to eat, but I do think the economy is going to be extremely sluggish – very, very sluggish. I think we’re going to have high unemployment and there’s going to be more unrest, but I think we’ll slog through it.

DAVID: As you contemplate the future, is there anything in particular that keeps you up at night?

LOF: I don’t stay up at night and worry about the economy. I do think that for most people that have been fortunate enough to live to an older age, the biggest concern they’ll face is about their children and grandchildren. The older folks will struggle through it because when you get into your sixties and seventies, you don’t need that much, and you can adjust, and you can compensate one way or another.

But when you’re young and you’ve got a family, it’s much harder to adjust, and I think those are the people that I worry about, and that’s what I think other people are going to be worrying about, too. They’re going to have their kids moving back in with them and not having any kind of self-esteem, and they’re going to be worried about their grandchildren. That’s really where the issues are, not people losing sleep over their own ability to survive.

DAVID: A wise observation. On that note, thank you very much for agreeing to this interview.

[Insightful interviews and analyses are part and parcel of The Casey Report. Big-picture perspectives combined with actionable advice on contrarian investments give you a deeper understanding of global trends and help you protect your wealth in times of crisis. Take The Casey Report for a test drive today: for just a few days, you can get a full year of invaluable information for just $98… a savings of 72%, with three-month money-back guarantee.]

How Debt Is Killing Us

Too Much of a Good Thing Is Not a Good Thing

By David Galland, Managing Director Casey Research

I am beginning to feel a bit like one of the French unfortunates stumbling through the fog in the Ardennes, circa 1914. Except that, instead of Germans full of deadly intent coming at me in the gloomy forest, it is a flock of black swans.

As it was for the French in the Ardennes, the number of problems – then Germans, now black swans – is becoming overwhelming.

Consider just a little of what we as investors, and as individuals looking forward to retirement in accommodations more commodious than a shipping box, must contend with:

  • The Euro-Stone. Despite all the bailouts and bluster flying about Europe, the yields in the wounded “piiglets” of Greece, Portugal, etc. have failed to soften to more tolerable levels. Worse, yields in the fatter PIIGS of Spain and Italy are hardening. This is of no small import to the German and French banks, which together are owed something like US$2 trillion by the porkers. At this point, it is becoming clear that the eurozone’s systematic flaws doom the euro to continue trending down until it ultimately takes its place in the pantheon of failed monies.
  • The Yen Has Lost Its Zen. This week the Japanese government again began intervening in currency markets because, remarkably, the yen has been pushed to highs against the dollar. This in a nation with a government debt-to-GDP ratio that is better than twice the also horrible ratio sported by these United States.

That ratio ensures that Japan’s long struggles will continue, burdened as it also is with the aftermath of the deadly tsunamis and the ongoing drama at Fukushima. Adding to its woes are the commercial challenges it faces from aggressive neighbors, and maybe worst of all, the demographic glue trap it is stuck in, with fewer and fewer young to pick up the social costs of the old. Toss in the waterfall plunge in Japan’s much-vaunted savings rate – formerly a big prop keeping Japanese interest rates down – and the picture for Japan is anything but tranquil.

  • China’s Crucible. There are many reasons for being optimistic about the outlook for China, including a large and hard-working populace. But there is one overriding reason to expect a big bump in the path to China’s emergence as the world’s reigning economic powerhouse.

Simply, it’s a capitalistic country with a communist problem.

Now, in the same way that some people believe in leprechauns or any of dozens of other magical beings, some people believe that an economy can be successfully commanded just as a captain commands the crew of a Chinese junk cruising along the coast. It’s a fantasy.

While the comrades in charge have done quite well – largely by getting out of the way of natural human actions – they are fast reaching the limits of their ability to navigate the shoals. As I don’t need to tell you, China is a massive country, with hundreds of millions of people capable of every manner of human strengths and frailties. But if they share one interest, it is in a job that allows them to keep their rice bowls full and a roof over their heads. Said jobs don’t come from government dictate – at least not on a sustainable basis – but rather by the messy process of free-wheeling commerce… and the more free-wheeling, the better.

In the July edition of The Casey Report, guest contributor James Quinn discusses the very real challenges facing China, not the least of which is that in the latest reporting period, official Chinese inflation popped up to 6.4%. Even more concerning was a 14% rise in the price of food.

Scrambling to keep employment high while also keeping inflation low, the Chinese government is throwing all sorts of ingredients into the mix – building ghost cities, raising interest rates, stockpiling commodities, clamping down on dissent, hacking everyone – but in the end, the irrefutable laws of economics must prevail. And so the Chinese government will have to atone for the massive inflation it unleashed in 2008, and for the equally disruptive misallocations of capital that are the hallmark of command economies.

While the blowup in China will wreak havoc in world markets, including many commodities, a bright side for gold investors is that the country’s rising inflation should help keep the wind in the sails of monetary metal. It’s no coincidence that the World Gold Council’s latest data show investment demand for gold in China more than doubling in the first quarter of this year.

  • Uncle Scam. Then there is the United States. Casey Research readers of any duration know the fundamental setup… The political avarice that dominates both parties… The fear and greed of John Q. Public and his steady demands that the government do more… The scam being run by the Treasury and the Fed to provide the funny money to keep the government running… The cynical attempts by certain politicians to stoke a class war… The cellars full of toxic paper at the nation’s financial institutions… The outright corruption and deceit of the various government agencies as they twist and torture the data to fool the people into supporting them in their scams.

But there’s a growing problem: An increasing number of people and institutions are coming to understand just how intractable the problems are. This has resulted in a steady move into tangible assets – gold, especially – that are not the obligation of any government. And it’s not just individuals and money managers moving into gold, but central banks as well. That is an absolute sea change from the situation even a few years ago.

Meanwhile, with the Treasury unable to borrow since May, a backlog in government financing needs has built up. Which begs the question: With the Fed standing aside (for the moment), where is the government going to find all the buyers for the many billions of dollars worth of Treasuries it needs to flog in order to keep the scam going?

If I were a conspiracy theorist, I might look at the sell-off in equities this week, triggered as it was by nothing specific, and see a gloved hand operating behind the curtain. After all, nothing like a good old-fashioned stampede out of equities to send billions chasing after “safe” Treasuries… which has been exactly the case this week.

Regardless, with the crossroads for hard choices now behind us, the global economy finds itself at the top of a long hill… with no brakes.

From here on, it will increasingly be every nation for itself – meaning a return to competitive currency devaluations and, in time, exchange and even trade controls.

And we will see a return of the Fed to the markets. On that topic, I will once again trot out a chart from an article by Bud Conrad that ran in The Casey Report a couple of years back.

I do so because it shows what I think is a very strong corollary between what occurred in Japan after its financial bubble burst and what is now going on here in the U.S. (and elsewhere). As you can see, as a direct result of the Japanese central bank engaging in quantitative easing, the Japanese stock market bounced back strongly. But then, when the quantitative easing stopped, the market quickly gave back all its gains.

excess reserves boosted japanese stocks

If I had the time and the resources to whip up a chart overlaying the quantitative easing here in the U.S. of late versus the equity markets, I would. But I don’t, and so will delve into that fount of all information – the Internet – and grab a chart constructed by someone else (in this case, Doug Oest, managing partner of Marquette Associates – thanks, Doug!)

As one can readily see, the Japanese experience is indeed a corollary to what’s happened here, with QE pushing the stock market higher. Conversely, until the Fed comes back in, equities could be in for a rough ride. Likewise, when the Fed returns with the next round of QE, stocks could put in a very nice rally.

federal reserver securities held

Some conclusions:

  1. The Fed will have to roll out another round of quantitative easing. And it will likely have to once again provide swap lines to the European central banks as it did in 2008 – though this time around, a belligerent Congress is watching the Fed’s every move, so it may not be able to move as quickly as it would have otherwise. In the end, however, given there is less than nothing being done on the front of fiscal policy, it will fall to the Fed to once again ride to the rescue. But it will do so on a lame horse.
  1. A delay by the Fed to act could help the Treasury, at least temporarily. Per above, the U.S. government has to move a boatload of paper by the end of this year. If it wants to avoid the dire consequences of having to pay out higher yields in order to attract sufficient buying, it will have to find a lot of demand in a hurry. Should the Fed sit on its hands a bit longer, especially in the face of the escalating euro crisis, the resulting turmoil in global equity markets could provide the necessary demand to clean up the backlog and keep the U.S. government operating.?(In July’s Casey Report, Bud Conrad dissects the situation and comes to some startling conclusions… and an emerging profit opportunity.)
  1. The return of the Fed may signal the beginning of the end. In the face of broad weakness in the global economy and in most commodities, the fact that gold has held up so well is a clear indication that there has been an intrinsic change in the gold market. Barbarous relic no more, it has clearly been returned to its longstanding role as sound money – unique and increasingly valued when compared to the fiat competition.

This role will only become more crucial as the world’s desperate nation-states fire their currency cannons in the war to remain viable. The Fed’s return to Treasury markets will be, in the rear-view mirror of future history, seen to be a seminal event – the beginning of the end of the current fiat monetary system.

Simply put, too much of a good thing is too much of a good thing. And make no mistake, the decades of operating under a fiat monetary system have been a very good thing for the political classes and their pandering cronies.

Those good times are coming to an end.

[Savvy investors can still make money in a crisis… often the returns are even greater when times are tough. Learn all about the smart money’s way of crisis investing and Bud Conrad’s profit opportunity mentioned above – with a risk-free trial subscription to The Casey Report.]

The U.S. Monetary System and Descent into Fascism

us monetary system and descent into fascismThe following interview with Dr. Vieira was conducted in early June of 2011 for the subscribers of The Casey Report – but after careful consideration, we decided that the content is so important; it needs to be shared with a wider audience. Feel free to pass it along.

David Galland
Managing Editor
The Casey Report

Edwin Vieira, Jr., holds four degrees from Harvard: A.B. (Harvard College), A.M. and Ph.D. (Harvard Graduate School of Arts and Sciences), and J.D. (Harvard Law School).

For more than thirty years, he has practiced law, with emphasis on constitutional issues. In the Supreme Court of the United States, he successfully argued or briefed the cases leading to the landmark decisions Abood v. Detroit Board of Education, Chicago Teachers Union v. Hudson, and Communications Workers of America v. Beck, which established constitutional and statutory limitations on the uses to which labor unions, in both the private and the public sectors, may apply fees extracted from nonunion workers as a condition of their employment.

He has written numerous monographs and articles in scholarly journals, and lectured throughout the county. His most recent work on money and banking is the two-volume Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution (2002), the most comprehensive study in existence of American monetary law and history viewed from a constitutional perspective.

He is also the co-author (under a nom de plume) of the political novel CRA$HMAKER: A Federal Affaire (2000), a not-so-fictional story of an engineered crash of the Federal Reserve System, and the political upheaval it causes.

His latest book is: How to Dethrone the Imperial Judiciary… and Constitutional “Homeland Security,” Volume One, The Nation in Arms.

We first met Dr. Vieira at our Casey Research Boca Raton Summit and were sufficiently impressed to want to hear more, and to share more, of his work with readers of The Casey Report.


DAVID: Before kicking things off, I’d refer readers to Dr. Vieira’s in-depth and excellent paper, “A Cross of Gold,” as that provides a more detailed analysis on how the corrupt U.S. monetary system might transition into something more honest and effective.

Getting started, from a big-picture perspective, technically speaking, is the current U.S. monetary system actually constitutional?

EDWIN: Well, technically speaking, factually speaking, legally speaking, no. In a word, no.


DAVID: Why not?

EDWIN: There are two levels to consider. First, there’s the straight currency level – what is supposed to be the official monetary unit. Then there is “other,” which I distinguish as different from the official monetary unit because the Constitution doesn’t prohibit private parties from creating media of exchange for their own uses, as long as those media of exchange are non-fraudulent and they’re operated in an otherwise honest commercial fashion.

But the official unit of currency is supposed to be the dollar, and I’ll tell you exactly what a dollar is – it’s 371.25 grains of silver in the form of a coin. That was determined as a historical fact in 1792. Actually the dollar was adopted before the Constitution was even written. It was adopted by the Continental Congress under the Articles of Confederation, the so-called Spanish milled dollar, which was the actual unit that was circulating then, because there had been essentially no coinage under the various colonial regimes in colonial America. So that’s the dollar unit.

Well, do we have that now? The answer is, “Well, essentially, no.” First, obviously they are not coining a true dollar, they coin a Liberty Silver Dollar, but that’s 480 grains, not 371.25 grains. And you have various gold coinage with dollar denominations on it, but those dollar denominations have no real relationship in terms of market exchange ratio to a silver unit of 371.25 grains.

So the short answer is that within the coinage system we don’t have what we’re supposed to have. We have silver coins, we have gold coins, but they’re not properly weighted or regulated. And then, of course, we have these base metallic coins, which have no constitutional status at all – at least with respect to being legal tender for their face values. So on the coinage side, we have a mélange and a mess. At least there is some silver and gold coinage, but it doesn’t meet the constitutional requirements.

On the other side, the so-called official paper money side, the Constitution does not provide for official paper money. What it does address are two provisions; the first, dealing with the states, specifically says, “No state shall emit bills of credit.” As a word of explanation, bills of credit were the founding fathers’ terminology for paper currency.

This is interesting because the paper currency they actually used and emitted were bills of credit that promised to pay something, typically gold and silver coins, specified on the face of the bill. So even those types of paper currency, fully redeemable paper currency, were outlawed for the states because the states had emitted them in vast excess. That was the historical basis for the outlawry.

Now, turning our attention to Congress, you need to recall that Congress only has the powers that are granted to it. You don’t look in the Constitution for prohibitions on Congress’s authority and assume that it can do everything that isn’t prohibited. You look for delegations of authority, and you assume that anything that hasn’t been delegated is prohibited.

If you look at the original draft of the Constitution in the Constitutional Convention, the Federal Convention of 1787, it said, “Congress shall have the power to borrow money and emit bills on the credit of the United States.”

That language was taken from the Articles of Confederation. The Congress operating under those articles had the power to borrow money and emit bills – emit paper currency – and they did it. They emitted the so-called continental currency from which came the phrase “not worth a continental” because they emitted so much of it that it depreciated very close to worthlessness.

At the Constitutional Convention, you had people in attendance who had been members of the Continental Congress. They had been members of various state legislatures. These were the leading political figures in the country. They had to a large extent been the ones who had emitted continental currency or had emitted various state bills of credit. So this was a question that wasn’t in some way alien to them as they had been involved in it only a few years earlier.

So the first draft of the Constitution was put forward with the same power that the Continental Congress had, and there was a debate. You look at Madison’s notes, and it was a rather vociferous debate, and they threw out the words “emit bills,” so that now that provision of the Constitution says, “Congress shall have the power to borrow money on the credit of the United States.” It says nothing about emitting bills.

Well, by hypothesis, if the power is proposed and then stricken from the final version, it doesn’t exist, right? You don’t need to be a Harvard law school graduate to understand that.

So we look at those two provisions of the Constitution: One explicitly prohibiting the states from emitting bills of credit, because otherwise the states would retain that power. And the other with respect to Congress, where they didn’t grant the power, even though the power was proposed to be granted and that proposal was overruled, and so it wasn’t granted. Based on that it is clear, I would say, that there is no power in Congress or in the states to issue bills of credit.

What we have now is something I think goes almost beyond the bill of credit, though it’s not really fiat currency because the Federal Reserve note, according to the statute, is supposed to be redeemed in “lawful money.” So in principle one could go back to the Federal Reserve Bank or one could take it to the Treasury – both have the obligation of redemption – and you could exchange a Federal Reserve note for one of these base metallic coins now in circulation. So, I guess it still could be called a bill of credit in the sense that you can actually receive some coinage, but what is the coinage that you receive?

Interestingly, we had an example of this type of problem in the period around the Civil War. During the Civil War and just after, the Union Government issued “greenbacks” – legal tender U.S. Treasury notes – and that was the first time that the government had purported to issue any kind of paper currency under the Constitution.

They did it once again under a wartime emergency – and for a short time, those things were not redeemed because the government was not paying out gold except as interest on bonds. They had to suspend specie payments during the war, but the Supreme Court upheld the constitutionality of that issuance of those greenbacks, I think erroneously, but they upheld it specifically on the basis that the greenbacks were to be redeemed in the constitutional currency of gold and silver.

All right, so even the furthest extent of error that has been made by the judicial system, with respect to paper currency, was premised on that paper currency being a true bill of credit in that it would be redeemed in the constitutional coinage of the country.

Well, if you look at the Federal Reserve note, you have a number of problems with it: Number one, it’s not issued by the Treasury. It’s issued by this banking cartel. No Federal Reserve note can come into existence unless one of the 12 regional banks, each of which is a private corporation, goes to the Board of Governors with certain assets defined in the statute and asks the Board of Governors to generate Federal Reserve notes.

The Board of Governors can’t generate Federal Reserve notes on its own, neither can the Treasury. So these things are being generated by a private corporation, and they’re not redeemable as a matter of law in the official constitutional silver or gold currency of the country. So they probably have four or five constitutional strikes against them. Especially if you look at the difference between U.S. Treasury notes and Federal Reserve notes. Treasury notes were always the product of some specific statute enacted by Congress, where Congress would say that so many millions of dollars’ worth of these notes are to be emitted.


DAVID: Right, and emitting those notes obviously falls within their right to borrow money.

EDWIN: Well, assuming that that’s what they’re doing – and that was the Supreme Court’s decision in the legal tender cases after the Civil War – they said, well, that’s a form of borrowing money. It really isn’t because it’s a form of generating money. You don’t borrow money when you generate money – the concept is nonsense – but even assuming that that’s the case, Congress has the power to borrow money and they specify a certain amount of money.

Well, they haven’t specified a certain amount of money to come out of the Federal Reserve system ever. There’s absolutely no specification – that’s all left to the whim of the Federal Reserve banks. So assuming that Congress had the power to generate Treasury notes, they would do it in a controlled fashion by telling us exactly how much is supposed to come out with each emission. Here they have purported to delegate this power to a consortium of private bankers, so this is like six or seven strikes. This is worse than baseball.


DAVID: And at this point, you really cannot redeem your Federal Reserve notes for anything anywhere. I mean, you can trade them with other people for other goods, and then you can take them to the bank and redeem them in base metal coins worth a fraction of their face value.

EDWIN: Well, initially Federal Reserve notes were required to be redeemed in gold, and then that was removed in ’33 and ’34 with the gold seizure. So now we have notes that, as John Exter used to say, are an IOU-Nothing Currency – because with respect to the banks and with respect to the Treasury, they owe you nothing, and if you go into the marketplace, you may be able to get whatever someone will give you for them, but you have no legal right to demand any particular amount of anything.

A redeemable currency, by law, is a currency that has a requirement that the issuer redeem it in something that is specified, a certain weight of gold, a certain weight of silver, whatever. So at one time, Federal Reserve notes were redeemable currency.

Now, I suppose, as I said, they’re not a fiat currency because you can get this base metallic stuff for them, but the constitutional requirement, assuming that you could have a bill of credit at all, would be that it had to be paid in the constitutional coinage unit. So this is the problem. Constitutionally, the thing is a first-class mess.


DAVID: So you’ve got eight strikes or so against this currency, constitutionally speaking, and yet the situation persists. Why hasn’t there been a successful challenge to the system in the courts?

EDWIN: Looking at challenges that have come up over the years, I would start by looking back to the ’30s, because in the ’30s you had two events. The first was a gold seizure followed by the second, the prohibition of gold clauses in contracts.

You had one set of cases that came up to the Supreme Court dealing with the prohibition of gold clause contracts, and one can only look at those and shake one’s head and say, “Well, this is just, you know, fraud, complete double talk, nonsense.” And interestingly enough, they never took on the gold seizure. They never decided a case on the gold seizure, even though cases were brought to them. They refused to hear them, and I think the reason was even they knew they couldn’t figure out how to justify that one, how to rationalize that.

Subsequently, you’ve had attempts by people to challenge the Federal Open Market Committee in particular, because the Federal Open Market Committee of course is composed not only of the members of the Board of Governors of the Federal Reserve System.

Now, arguably, because they’re appointed by the president and confirmed by the Senate, you could say they’re officials of the government, although that’s an open question that’s never really been decided. But the other members of that committee are representatives of the private Federal Reserve regional banks, about which there have been a number of challenges brought on the ground that you can’t allow private parties to participate in that kind of a committee – a committee that is essentially making governmental monetary policy.

Every one of those challenges has been thrown out without reaching the merits. They’ve been thrown out on some kind of standing ground – either the courts have refused to hear them at all, or they’ve thrown them out on what I would call tangential grounds, really not getting to the merits. I think the ultimate reason for that is probably out of fear or prudence, depending on how you want to characterize it.

I mean, if I’m a judge and somebody comes to me with one of these cases and says, “I want you to overturn this entire monetary structure by knocking out this important provision or that important provision,” I say to myself, “Well, yes, I guess I could do that, legally speaking. I can write an opinion saying that this provision of the law is unconstitutional and it’s no longer effective.”

But then what happens?

I can’t write, in my opinion, an order to Congress to pass a particular statute to correct that situation, so although I can throw a judicial monkey wrench into the gears, I can’t do anything to prevent the disaster that will then occur as a result of blowing up that mechanism. Ergo, wearing the hat of a judge, I’m going to stand back and not get involved but rather leave it to Congress to solve, if possible.


DAVID: But once you start down that path where you have, let’s say, a certain amount of elasticity on when you follow the Constitution and when you just look the other way, doesn’t that set the stage for all sorts of gyrations and further miscarriages of justice and even fraud? As Doug Casey has commented on numerous occasions, at this point the country is being operated on a very corrupt basis.

EDWIN: Well, I agree with him 100%. After the Civil War, in the Knox v. Lee legal tender case, the Supreme Court could have said, “Yes, we understand this was done during the Civil War, but it’s unconstitutional, and you can’t continue with this. And so any contracts that were made in this illegal money will be revalued in constitutional money.” If they had taken that position back then, they could have worked it all out because they did just that for the confederate states.

The confederate states were considered to be an illegal operation entirely, a criminal rebellion. The confederate states generated a huge amount of paper currency, and a number of cases came to the Supreme Court after the Civil War dealing with the enforcement of contracts in the confederate states that had been made implicitly or explicitly in confederate money. What were we going to do with these contracts?

And the Supreme Court said, “Well, to the extent the contracts were for an illegal purpose, such as supplying arms to the Confederate Army, then they were void, but if it was a contract to buy wood or something from a farmer or whatever, these people were forced into using that currency because that’s where they were, they had no choice, and we will simply revalue those contracts and enforce them for their fair worth, that’s just simple equity.”

They could have done the exact same thing with respect to the greenbacks of the Civil War – saying that the greenbacks were unconstitutional and let’s never do this again. But they didn’t, and as a result set a precedent, and one precedent leads to another, and that’s precisely why we’re here.

The same thing during the 1930s with the gold clause cases: They could have declared that statute unconstitutional right then and there because nothing had yet happened, but they played this game in the Supreme Court.


DAVID: So, the Supreme Court ducked crucial issues and allowed precedents to be set for the creation of a monetary system that is clearly unconstitutional and, importantly, unsound. So here we are today, with everything totally screwed up. Do you think the monetary system now operating in the U.S. – and around the world, for that matter – can survive as is? Or is it going to have to change, and relatively soon?

EDWIN: Well, it’s going to have to change, raising the questions, “In what direction and under whose control?” Historically, the United States has seen each one of these faulty systems go into self-destruction mode, followed by the government ratcheting things up to the next-higher level.

Thus the First Bank of the United States was followed by the Second Bank of the United States, neither of which was really a central bank. They were just private banks that operated as fiscal agents for the government. And there were a lot of state banks, and these all went into some kind of failure mode.

Along comes the Civil War, and they come up with the National Banking System, which was a cartelization of banks tied into the U.S. Treasury, so they moved it from the level of individual banks – that might have been state chartered or chartered by Congress but were nevertheless essentially separate private entities – into a cartel structure that had a direct connection to the Treasury.

Now that direct connection to the Treasury was that those banks had to buy U.S. Treasury bonds, and then they would deposit those with the Treasury, and they’d get 90% of the value of the bonds back in currency, which they could then use for their own private purposes. That system didn’t work because at that point in time, people were not interested in amassing ever greater federal debt, and the expansion of that banking system depended upon amassing ever greater amounts of federal debt.

Well, that system goes into crisis and what do they do? Do they correct it? No, they go to the next level and give us the national lender of last resort, the Federal Reserve System. Essentially improving the cartel structure. That thing lasts only from 1914 to 1932, about 20 years, before it collapses. Does Roosevelt solve this problem by dealing strictly with fractional reserve? No, he raises it to another level by expanding the powers of the Federal Reserve System and taking gold away from the American people.

That lasts until after World War II, at Bretton Woods, when the United States Federal Reserve System and the Federal Reserve note become the World Central Bank and the World Central Reserve Currency, as a matter of fact, and how long does that last? Until 1971, right? By then, so much gold has left the country because of the profligate policies of Congress, especially the war in Vietnam and Johnson’s War on Poverty, that Nixon finally has to stop gold redemption in 1971.

Which brings us to the present, and we are again back in crisis mode, and what are they telling us? “Oh, we’ve got to go to the next level. We’ve got to create a New World Central Bank.” Maybe this will be the IMF or whatever, but we are going to expand the thing to the next level until we have the final blowout. Because this is what they’ve always done.


DAVID: It seems to me that once the U.S. government starts talking about a global currency that Americans will finally say, “No, enough, we’re just not going there.” For a lot of reasons, nationalism and because of the negative examples being provided by the failing experiment with the euro?

While I have long been shocked at the depth of the apathy of the American people, I have a hard time believing they would turn our currency over to the IMF or any international body. If you agree, doesn’t that mean that we could be at the point now – in this crisis – where it’s not going to go any further? That the madness stops here?

EDWIN: Yes, I was not saying that their plan will work, rather I was just restating what their plan is. I don’t think it’s going to be successful. The euro gives us a good example of why it’s not going to be successful. Also, they have another difficulty; to set up a system of this kind, they’re going to have to pass some serious legislation to tie us into some kind of world currency system.


DAVID: Which will never happen.

EDWIN: That’s right. Can you imagine what the deadlock would be in Congress over that? So actually we have an opportunity here. The door has finally opened for some serious monetary reform because the other side has come essentially to a dead end.


DAVID: Because they can’t keep amassing ever-increasing amounts of national debt. We’re reaching the limit on that.

EDWIN: That’s right. So here we are, and now the question really comes back to whether there are enough people in America who understand this and are willing to take the appropriate steps to start putting in some alternative?

I don’t think this can be done from the top down. I don’t think Congress is going to solve this problem, and certainly the bankers are not going to give them the right legislation to solve this problem. It has to be solved from the bottom up.


DAVID: Bottom up?

EDWIN: The beauty of the constitutional system is, we have these intermediate political bodies called the state governments that have certain reserved constitutional authority. They haven’t been exercising it for a long time, but it’s there, and part of that is monetary, and interestingly enough this has already been decided by the Supreme Court. It’s not as if I’m inventing this idea.

After the Civil War, we had a similar situation. Before they went back to gold redemption, you had depreciating legal tender Treasury notes circulating, and there was gold and silver circulating as well. That had not been withdrawn from circulation, so in the first case of this kind, the State of Oregon had a law that required that its taxes be paid in gold and silver coin and someone tried to pay in legal-tender Treasury notes on the theory that Congress has made these legal tender for all debts and therefore that overrides the laws of the State of Oregon requiring payment of taxes in gold and silver.

Well, the case gets all the way to the Supreme Court and the Supreme Court says “No, wrong. The states have residual sovereignty.” They are sovereign governments, except to the extent that they’ve surrendered certain powers to the national government, and one of the powers they have not surrendered is the power of taxation – one of the basic governmental powers. I guess you could include borrowing and spending, so forth and so on, but they have the right to perform basic governmental functions, taxation being one of them.

If a state determines for its own purposes it needs to tax in gold coin and silver coin or bullion, then the state can do it and Congress has nothing to say about it. From which it would follow that step number one would be for a state to start saying, “We’re going to tax or spend or borrow,” or whatever, in gold coin, silver coin, gold bullion, silver bullion.


DAVID: Recently there was legislation in Utah defining gold as being legal for settling debts and so forth. Correct?

EDWIN: Well, there’s a statute that just came out in Utah, which I would call more of a “making a statement” statute than a substantive statute, because they recognize the United States gold and silver coin as legal tender. Well, they have no choice – it is, that’s constitutional. The statute merely recognizes that people can make contracts, enforceable contracts using gold and silver coin, and that’s also their right. But it’s the first time that a state has actually stood up and said something about monetary policy. Even so, a journey of a thousand leagues begins with a single step, right?


DAVID: Looking at the descent of the dollar and its steep downtrend since 2002 – against other currencies and, of course, gold – one can’t but wonder, how much further can it fall before you get a real crisis? One that the government won’t be able to deal with?

Based on the historical precedent you mentioned, it just continues to go down until it reaches the point they have to come up with something else. Given the strong probability that, in time, the Fed is going to have to step back in with another round of quantitative easing, do you think that could be the trigger for the bottom falling out from under the dollar?

EDWIN: I think so, because of the large percentage of debt required to finance the government at this point – I think it is now running around 46%. Victor Sperandeo has done some work on hyperinflations and found that apparently once that number gets over around 40-41%, that’s the end.

According to his work, in every big example of hyperinflation since the French Revolution, that number is apparently the tipping point on the rollercoaster. You’ve gone over the top, and now gravity takes over and down you go to the bottom. They can’t stop the thing. So we’re now at 46%, at least it was on the 12th of May, 46%, and it doesn’t seem to me there’s any will or intelligence in Congress to correct this, and it’s not going to be the Federal Reserve that corrects this, it’s going to have to be done legislatively.

Of course, the government could do something radical to correct the situation – there is always the “if-then” type analysis, but assuming that they don’t take radical steps to correct it, which seems a safe assumption, that’s the direction we’re heading in.


DAVID: So we could already be over the top on this, as far as this is concerned.

EDWIN: Yes, that’s the fear – and once we’re over the top, that’s the end of the game. The rollercoaster goes to the bottom. There’s no stopping it.


DAVID: Interesting in this whole discussion is that the U.S. has been the driver in the global adoption of the monetary system we now have, starting with Bretton Woods and then when Nixon stopped gold redeemability. At that point, everybody just sort of went along, continuing to use the U.S. dollar as a de facto reserve currency. But all of a sudden, today, you look around and can’t help realizing the problem is global in scale, leaving none of the paper currencies as a viable alternative. Are there any conceivable solutions to a crisis of this scale?

EDWIN: If you want to go back to a sound currency system and a sound political system – and by sound political system, I mean one in which the political powers can’t manipulate money – then it has to be tied to some free-market commodity, right? Historically the two that have worked have been gold and silver, and that actually is the constitutional standard, so unless we want to change the Constitution, we have to work with that.

Fortunately it will work, so we can do that. The mechanism for doing it is the question, and as I say, it’s got to come through the states. Looking at this from the investor’s point of view, I don’t know if there are good investments in the collapse of Western civilization. Which is what we’re facing.


DAVID: A lot of people think that if you own gold, enough gold, that you’ll come out of this okay. What is your general view on that?

EDWIN: In the hyperinflationary event, if you held something like 15% or 20% of your total portfolio in gold and the rest of it goes to zero, you won’t gain anything but you will not lose anything. That said, my interest has never really been in this from an investment point of view, except investment in a political sense.

Looking down the road in an attempt to see what this country will look like if we go through a hyperinflationary event – and if out of that doesn’t come a sound currency and restrictions on the government’s power to manipulate money and credit – it appears to me that what could emerge is a first-class fascist police state.


DAVID: Because restricting the government’s ability to manipulate the money also restricts their ability to do everything that they are currently? Putting in those restrictions would then limit them from being involved in so many parts of the economy, as they now are. Obviously, in a monetary system built around sound money, they couldn’t keep spending money at this level.

EDWIN: That’s right. If you have a system based on real money, we would not have this elephantiasis of government. So that was the great failure of the Supreme Court not asking, “Wait a minute, if we let them have this, where will that lead?” They didn’t look down the road. Maybe they did. Maybe that’s what they wanted. Maybe they were extreme nationalists of the Hamiltonian view of “The more power the better,” but an intelligent person will look and say, “Wait a minute, we can’t put these powers into the hands of mere politicians.”


DAVID: So do you really think a collapse of the Western civilization is avoidable at this point?

EDWIN: No. That’s what I’m worried about.


DAVID: It seems avoidable if the politicians acknowledged the reality of the situation and dealt with it accordingly, but do you see any hope that it’s politically likely?

EDWIN: Well, I’m going to give it a year or two to see what the states start doing here. We’re seeing more and more resistance, at least verbally, coming out of state legislatures and even out of some state governors to various encroachments by the people in Washington. We’ve seen some push-back in the healthcare area, TSA, and then there’s this business with illegal immigration, and now some states are beginning to talk about monetary reform.

There’s not too much the states can do about TSA. There’s probably not too much they can do about healthcare, because that would have to be decided in the courts, and god knows that’s a wasteland. Immigration is kind of back and forth/up and down, but on monetary reform, if a state passed the right statute, they could potentially bring that about within 30, 60, or 90 days. Especially if they put in one of these electronic gold/electronic silver type systems, which is off-the-shelf technology.


DAVID: How could it work?

EDWIN: Within 90 days of the passage of the statute, you could have everybody in that state with electronic gold debit cards dialed into the price structure in all of the supermarkets and so forth. People could essentially opt out of the Federal Reserve System if they wanted to.


DAVID: So watching the states for a hopeful plan is something we can do.

EDWIN: That’s right, and if they don’t do it within the next year or 18 months, then I would begin to become very pessimistic.


DAVID: Since we’re talking about being pessimistic, let’s talk a bit about the real dark side of all of this – namely that it appears to many that the U.S. is in the early stages of becoming a police state. Supporting that view, there are things I thought I’d never see in my lifetime, institutionally sanctioned renditions and torture, Guantanamo, the recent Supreme Court ruling that police can kick down your door based upon hearing what they consider to be a suspicious noise – the list of things the government is doing these days goes on and on, including the current blatant attempt to assassinate Gaddafi. So where do you think we are on the scale from 1-10, 1 being perfect liberty and 10 being full-on police state?

EDWIN: About 6-1/2 to 7, because they’ve set up the principles for it. You don’t have to have the police breaking in every day to have a police state, you simply have to have the judiciary saying, “If they break in, we’ll let them do it.” It’s the principle of the thing. The NKVD didn’t arrest everybody in Stalin’s Russia, but the principle was in place so they could arrest anybody, and that’s the problem.

If you type “police brutality” into Google or some other search engine, how many YouTube hits do you think you’ll get? Huge number, right? And they become more grotesque every day. If I were a Supreme Court justice, I might look at this and say, “This is the real problem in the country,” but of course those people live in an ivory tower, so they don’t know or perhaps care about reality. If they did, they would know enough to know this is becoming a real problem.

So, as a Supreme Court justice, would I want to give them a principle that allows the police to solidify and expand that kind of oppressive behavior? And the answer would have to be, “No, I don’t.” The Constitution could never have foreseen this or allowed for this, right?


DAVID: Right.

EDWIN: And yet they allow for it. Now, either this is the biggest bunch of idiots that has ever been assembled in judicial robes in the history of humanity, or there’s some other agenda going on here.


DAVID: Assuming that they are not complete idiots, what could that other agenda be?

EDWIN: In my view, and I’ve written about this for years, the people at the top levels of government understand that their monetary system is inherently flawed. That we’re on the Titanic, in a sense, and they know that this ship is going to sink. They don’t know when, but they know when it sinks, they’re going to have a huge amount of economic dislocation, social crisis and civil unrest to the level of revolt.

So they started developing this police state mechanism in the hopes of keeping the lid on the garbage can when the monetary system breaks down. The upper echelons of the judiciary have been going right along with this because they know what the program is. This is obvious. No one in his right mind would stand by and allow the sort of excesses we’ve seen.

Just the other day, the Indiana Supreme Court ruled that the Fourth Amendment doesn’t apply at all because you can sue the police after they’ve mistakenly broken into your home. But when they break into your home and they kill you, then what?


DAVID: Not a lot of recourse then.

EDWIN: Right, like that poor ex-marine that was shot 60 times in Arizona, and he’s dead – now what, can he bring a lawsuit? Have we lost our minds? I mean, you don’t have to be a Harvard-educated lawyer to know that this is insanity. This does not rise to the level of just mere error. No one in his right mind can write these kinds of opinions, which means that either they’re insane, which I don’t believe, or they have another agenda, and the judicial opinions are simply camouflage – they’re propaganda to convince us that “Oh well, this is all right” because Judge Flapdoddle told us that it’s all right.


DAVID: Likewise, when you look at what’s been going on with the government’s spending, which is clearly insane, I mean, who would have thought they could even conceive of running a $1.5 trillion annual deficit?

EDWIN: And going up.


DAVID: And going up, and planning on this continuing well into the future. In your paper “A Cross of Gold,” you mentioned that all told, the U.S. government’s total outstanding obligations at this point add up to something like 200 trillion dollars?

EDWIN: Yes, that’s Professor Kotlikoff’s, at Boston University, figure, not mine.


DAVID: So it’s hard to draw any other conclusion than that the government is operating in a complete fantasy. That everything is completely off the rails.  Then you look at the judiciary and some of the things they have approved and looked the other way on, and it sure begins to look like fascism to me.

You and I see it, a lot of our readers look at it, but most people are so passive about it. Everybody is so quiet, and there is nobody making any waves – is that because it’s too late? Before you answer, I’ll give you just a quick anecdote that I think makes the point.

I was at a party not too long ago with a bunch of young people, and we were talking about some topic that was mildly controversial, and one of them said, “I’d love to look up more about that online, but I don’t want it to be part of my permanent search record.” So, the youth of America already have it in their heads that anything they do online is being monitored and will be in their search records forever and accessible to the government.

Back to my question, have we reached that stage where people are quietly huddling behind the doors of their houses, trying to keep a low profile so the government will leave them alone?

EDWIN: Given the current state of things, I’m sure there are a lot of people deliberately deciding to adopt a low profile, politically or socially. A lot of this has to do not so much with politics but what your neighbors or your coworkers will say about you, right? If you tell them something that is actually happening in the world, you will be labeled a conspiracy theorist; they’ll look at you as if you’re crazy.

But what about the activists? At a certain stage, the great mass of people will look around for leadership figures. When the economic crisis comes, they’re going to want someone to tell them how to get out of it. They’re not going to know the answers themselves. The question is, will there be activists, leadership figures, proposing the right solutions – and how soon will they come along?

That’s why I look at this Tea Party Movement, using that in a generic sense, an indication of the ground swell of discontent that’s out there. There’s a huge amount of that, but at this point it’s not particularly directed. Of course the establishment is trying to co-opt it, with Gingrich and others trying to claim that they’re leadership figures in this movement, and that deflects it from the direction in which it ought to go.

By contrast, you do have the Ron Paul-type movement. I mean, look at Ron Paul as an example. This is not a charismatic figure. He’s a very diffident individual, a very shy individual, not someone that you could possibly imagine as a man on a white horse in a political sense. He certainly has had very little real effect in Congress. He’s been the gadfly, he’s been the critic, but he hasn’t put in any legislation of consequence that has been passed. He’s made a lot of noise about the Federal Reserve, but he’s constantly being blocked by the real power structure in Congress in terms of getting anything done there. Yet nevertheless a whole political movement has essentially crystallized around him.

I look at him as the surfer on the wave. The surfer is not the important thing, the wave is the important thing. The surfer would be nowhere without the wave. That wave is out there, and it’s just waiting for the right surfer. He’s the first one that’s come along, but there will be others, perhaps some state governor who is actually competent, and he looks at this monetary system and he says, “To hell with this. Here’s what we have to do,” and they put in that alternative currency statute, the proper one, not the kind of statement that was made in Utah, but a proper functioning one. In which case he will become the next president of the United States, and then we will see what will happen.


DAVID: Any time the states try to go their own way on issues that the federal government doesn’t like, the federal government starts to threaten them with losing their highway funds or education funds, or whatever. Isn’t that part of the problem?

EDWIN: Well, it certainly is part of the problem, and that’s why you’re going to have to have some real leader in the state who is going to say, “We have priorities, and our first priority is correcting the monetary problem, the currency problem, and we’ll worry about those federal education funds later. In fact, what we may do is stop paying some money to the federal government.”

Unfortunately, once you allow the federal government to have the kind of influence they now have over the states, the states have essentially rolled over. So, at some stage, they have to say no.

That’s why I say that at some point down the line, if we see nothing happening on the state level – if we see these bills being put in and being constantly defeated, and no one comes forward to take leadership on these issues – well, I’ll throw up my hands and say, “We just don’t have the leadership group, we don’t have the Patrick Henrys, we don’t have the Thomas Jeffersons, we don’t have the Sam Adams, we just don’t have those people anymore, and that’s the end.”

But I don’t believe it will come to that. We have over 300 million people in this country, we can’t find a few hundred?


DAVID: Well, we will certainly keep an eye on the states for somebody to show up one of these days. Governor Christie in New Jersey seems like a pretty sound guy.

EDWIN: I want to see just two things, because there are two things of real consequence right now in terms of the major powers of government historically and in terms of political philosophy. Those two things are the power of the purse and the power of the sword. In order to continue spending at the levels it now is, the government has to maintain control over the monetary system, and it has to have some kind of control over military and police force.

Under our Constitution, those two powers are supposed to be ultimately in the hands of the people. We’re supposed to have a free-market-oriented and -controlled monetary system based on gold and silver, so the politicians really do not have control over the purse. They have to come to us and ask for taxes. They can’t manipulate the money and use inflation as a hidden tax. We’ve lost that. We failed to assert it – let’s put it that way.

On the other side, we see this police state developing, with a centralized Department of Homeland Security in Washington that has tentacles reaching down into every local and state police force. This is completely contrary to the Constitution because the Constitution tells us that the thing that’s necessary for the security of a free state is what? A well-regulated militia. And what is a well-regulated militia? It’s composed, as the Virginia Declaration of Rights in 1776 said even before the U.S. Constitution, of the body of the people – the people organized in a certain way. Think of Switzerland.

Well, we’ve lost control over those two key elements, and until we get them back, we can only continue down this road to the full-blown police state. So in sizing up any politician, I’d start by asking them these two things: “What are you going to do in the state to return us to a system of constitutional currency with an alternative system in this state because we can’t do it in Congress?” And, number two, “What are you going to do to revitalize some kind of state militia structure, perhaps using Switzerland as the model because they’ve been very successful over the years, so that we are no longer under the control or answerable to Janet Napolitano?”

If the states can’t regain control over those two things, the rest of it is a waste of time. If you don’t have control over the high ground, as the military people would say, then you’ve lost the battle. Education funds, transportation funds, all the rest of this stuff is not even icing on the cake if you let the federal government continue to have those two powers.

They took power over the money a long time ago, and they have been systemically organizing this police state since well before 9/11; in fact, the plans for the Patriot Act were drawn up before 9/11. They understand where the high ground is, and that’s why if you are a state politician and you can’t answer those two questions – if you don’t tell me that those are your number one and number two priorities – forget it, we’ll look to somebody else for leadership.


DAVID: It seems to me that unless and until there is some sort of a push-back on the state level, the situation is going to grow increasingly dangerous, looking for a trigger, so to speak. Much in the way the Arab Spring blew up almost overnight. People looked at that and said, how did that ever happen? These are some of the most oppressed people in the world, ignorant and backwards and everything else, and all of a sudden they are in the streets, risking their lives for more freedom. So, it would seem that it’s just a matter of time before we see something akin to an American Spring here.

EDWIN: Oh, I think so, yes. It’s just terrible to think that we have to take second seat to the Egyptians in the promotion of liberty. Not to criticize the Egyptians, but Egypt has never been considered to be a country that philosophically was in the forefront of that area.


DAVID: Speaking of Egypt, I think the jury is still out on whether the military will allow the freedom movement there to take power. The Saudis are falling all over themselves to give the Egyptian military money, as is the U.S. government, so it would appear that we’re now trying to solidify their power.

EDWIN: Please don’t say “we” when referring to the people in Washington. Don’t include me in that list.


DAVID: (laughs) Doug Casey often says the same thing. And on that note, I’ll sign off by thanking you very much for your time. Let’s do it again some time.

Quoting James Turk on the video, “This video could be described as a teaching guide to sound money at the state level.  I think this video can be helpful in getting out an important message about sound money at the state level to bring about meaningful change. All it requires is state legislators spending 40 minutes to become educated on this matter. If they do that, I don’t see how any of them could reasonably deny the power of Edwin’s logic and discussion of the law.”

If you are interested in reading more fascinating interviews, controversial articles, and mind-boggling analysis of the economic “state of the union,” as well as the best ways to crisis-invest like the pros, try The Casey Report risk-free – with 3-month money-back guarantee.

3 Ways to Shelter Your Cash from Inflation

By Terry Coxon, The Casey Report

how to protect your cash from inflation
Toilet Paper made of 20 dollar bills

The high rate of inflation most of us believe is waiting not too far down the road will be an earthquake for investment markets. The likely winners (gold, silver, precious metals stocks) and the likely losers (long-term bonds and most stocks) aren’t too hard to identify. But separating the sheep from the goats is only one element for financial success in an environment of rapidly rising consumer prices.

Higher rates of price inflation will bring greater volatility to all financial markets. The higher you expect inflation and hence gold to go, the more volatility you should expect to see for assets of every type. Even if in fact the dollar is on the road to perdition, there will be detours and backtracking along the way.

Inflation doesn’t operate smoothly; it is a disrupter for both the economy and for the political system. From time to time over the next five to ten years, the Federal Reserve will come to see inflation as its most urgent problem. And every time that happens, the Fed will slow the creation of fresh dollars or even put up a big INTERMISSION sign and stop printing altogether for a while.

Such seizures of monetary virtue won’t last long, but while they do last, they will hammer most investment markets, including the market for the yellow stuff and for stocks of companies that produce or look for it. You could be absolutely correct about where the dollar is headed in the long run and still have a scary ride.

2008 was just a preview of the downdrafts you will need to survive. There will be even uglier smash-ups, and you don’t want to be among the hard-money investors who get carried off on a stretcher. To avoid being one of them, you’ll need to include cash as a constant, permanent element of your portfolio. Cash is a courage booster. Having a substantial cash reserve makes it easier to hold on to your other investments when they are getting battered and you are tempted to bail out. And cash gives you the wherewithal to buy on dips – and on the big dumps.

The Twins

Of course, cash will be the asset whose value is shrinking. But the rate at which the purchasing power of your cash declines will depend very much on how you hold it.

Interest rates on money market instruments, such as Treasury bills and large CDs, track the rate of inflation fairly closely. By creating money fast enough, the Federal Reserve can keep rates on money market instruments one or two percentage points below the inflation rate, but not indefinitely. And any such effort to suppress short-term interest rates succeeds at the cost of producing even higher inflation later. Similarly, the Fed can keep money market rates one or two points above the inflation rate for a while, with the likely eventual result of a slowing in inflation. But over long periods, the average yield on money market instruments about matches the average rate of inflation.

Given that money market yields travel the same path as inflation rates, holding cash doesn’t seem to be terribly painful. The loss in purchasing power about gets made up for by the yield. That’s a nice thought – until you think about taxes. Even though the yield is merely replacing the purchasing power being lost, the yield is subject to income tax, unless you do something about it.

Doing nothing about it is, in a subtle way, risky for your portfolio. When price inflation gets to, say, 10% and money market yields are near the same level, if you are in a 40% tax bracket, you’ll be losing purchasing power on your cash at a rate of 4% per year. The situation will get worse as inflation moves higher, and you’ll be tempted to cut back on cash in order to cut back on the leakage. And that will leave you dangerously ill-prepared for the next INTERMISSION sign.

Logically, then, to make holding cash cheap or even free, you need to hold the cash in an environment where the yield is protected from taxes. Let’s look at the possibilities, some of which, you should be warned, may make you say “Yuk.”

Deferred Annuities

A straight annuity is a contract with an insurance company that pays you a certain amount per year for the rest of your life. A deferred annuity begins with an accumulation period, during which the contract earns interest or some other investment return. You can end the accumulation period whenever you want and then either start receiving a lifetime of payments or simply withdraw the contract’s accumulated value.

Earnings in a deferred annuity are tax-deferred until they are withdrawn. So if the return on a deferred annuity tracks money market yields, then the real value of the annuity will hold approximately steady, even at high rates of inflation.

Deferred annuities are now an almost forgotten topic. They were, for the first time ever, a very big topic in the high-inflation years of the 1970s and 1980s. The reason was simple – sky-high interest rates. But in more recent experience, interest rates have been so low that the advantage of tax-deferred compounding has hardly been worth the trouble. It’s when interest rates are high that tax-deferred compounding brings a big payoff.

When price inflation heats up and puts money market rates on a boil, expect to see ads for deferred annuities on every financial street corner. The right annuity contract will certainly be better than leaving cash in a bank account, but it still won’t be the most attractive medium for holding cash through a period of rapid inflation. There are one, or perhaps two, limitations on an annuity’s appeal.

The first is that the protection from being taxed on a fictitious return only goes so far. Even though the money inside the annuity may be holding its purchasing power (with interest continuously replacing what is being lost to inflation), eventually you’ll cash the annuity in. At that point, all the interest will be taxable. After, say, a decade of high inflation, most of what comes out of the annuity will be accumulated interest – which will be taxable as ordinary income. So you’d have a one-time loss of nearly 40% of your purchasing power, assuming you’re in a 40% tax bracket. (I know that sounds awful, but it would be a far better result than paying tax on interest income year by year during a decade of rapid inflation.)

The second limitation is that, so far as I have been able to determine, no insurance company offers a program that would let you switch the value of an annuity between money investments and something related to precious metals. That may change as inflation and the public’s interest in gold picks up. But until it does, there would be no tax-efficient way to tap the purchasing power your annuity had been protecting to buy something gold-related during the downdrafts we’re trying to prepare for.

Cash Value Life Insurance

As with a deferred annuity, the earnings on a cash value life insurance policy can accumulate and compound free of current tax. But that’s where the similarity ends.

Unlike the earnings on a deferred annuity, the earnings on cash value life insurance can come out of the policy tax free. The tidiest way is for you to die at just the moment that is most convenient for your financial plan. An alternative, if you don’t have such an accommodating attitude, is to borrow the earnings from the policy. You can do so tax free if the policy satisfies the “7-pay” rule: pay for the  policy no more rapidly than with seven equal annual premiums.

Being able to borrow from the policy tax free would allow you to tap its value whenever gold and other hard investments have had a sizeable setback. Convenient. But, depending on your circumstances, that convenience may or may not be available to you for free.

Between the Internal Revenue Code’s requirements for a contract to qualify as “life insurance” and the perversely characterized “consumer protection” rules of the various states, it is not possible to buy a life insurance policy in the U.S. that does not have a face value far above the amount you’ve invested in the policy. The difference represents the insurance company’s risk – mortality risk – that you may stop breathing ahead of schedule. The insurance company, of course, will charge for that risk. There are a lot of variables, but think of the charge as amounting to something on the order of 1% per year of the capital you want to wrap inside the policy to protect the return from taxes.

Whether a cash value insurance policy (a 7-pay policy, so that you can borrow tax free) is a good place to shelter cash from the winds of inflation depends in large part on whether paying for mortality risk is or is not a wasted cost for you. If you now have a reason to own term life insurance, you are paying purely for mortality risk. In that case, it would make sense for you to convert to a cash value policy that could be invested in money market instruments as a way to prepare for high inflation. There wouldn’t be any additional mortality cost, and you would get the tax advantages of life insurance.

On the other hand, if you have no use for pure life insurance coverage, using a cash value policy for its tax advantages would require you to become a regular bettor in the actuarial casino, which you probably would not want to do.

Retirement Accounts

If it is available to you, by far the best way to hold cash through an inflationary storm is in an Individual Retirement Account. Without any of the costs that come with a deferred annuity or a life insurance policy, you can invest in T-bills, insured jumbo CDs and other money market instruments and in near-cash assets such as very short-term bonds. You can have a free hand to tap the cash at opportune times to purchase precious metals and precious metal stocks. The whole arrangement is protected from current taxes, and with a Roth IRA the proceeds eventually can come out tax free.

You can do exactly the same with a solo 401(k) plan. And if you have a 401(k) plan that’s sponsored by your employer, you may be able to do about the same, depending on the investment options the plan allows.

A retirement plan would be the ideal vehicle, but there is a size constraint. While the size of a deferred annuity or of a cash value life insurance policy is limited only by the size of your checkbook, IRAs are not so easily scalable. However, if you have a traditional IRA and would like to move a chunk of non-IRA money into it, there is a way to effectively do so.

Take a close look at your traditional IRA. How much of it is building tax-deferred wealth for you? Less than meets the eye.

If you are in, say, a 40% tax bracket, then no matter how large your IRA gets to be, when it comes time to take a distribution, 40% will go to the government. Your ability to postpone that event won’t change the nature of it. In effect, the government now owns 40% of your IRA, and you own only 60%. If there is, for the sake of round numbers, $100,000 in your IRA, only $60,000 is working for you.

Fortunately, there is a way to buy out the government’s share. It’s a Roth conversion. You pay the tax now, so that eventually your withdrawals will be tax free. The result: the assets you own directly decline by $40,000 (the money you spend to pay the tax bill on the conversion); and the amount in the IRA that is working exclusively for you increases by $40,000.

That’s a big improvement, because the net effect is to move capital out of a tax-paying environment and into a tax-free environment where all of the earnings get reinvested. To continue the example, the effective size of your IRA increases by two-thirds ($40,000/$60,000). That’s two-thirds more money doing the happy work of tax-free compounding for your benefit.

You can do the same with a solo 401(k) – effectively plump it up through a Roth conversion.

The financial logic of a Roth conversion is compelling. The case is even stronger if you first restructure your IRA as an Open Opportunity IRA. The Open Opportunity structure starts out as a big idea – radically greater investment freedom – and then gets bigger.

Instead of being restricted to the menu of investments allowed by your existing IRA custodian, your IRA would own a single asset – a limited liability company that you manage. Then you would roll over the investments from your existing IRA into the new IRA and then into the LLC. As Manager of the LLC, you would have the choice of keeping the existing investments or switching to real estate, gold coins, equipment leasing or almost anything else.

That’s the investment freedom. In addition, by designing the LLC appropriately, significant savings on the cost of your Roth conversion may be possible..

You can learn more about the Open Opportunity IRA in “The Year of the Roth,” in the June 2010 edition of The Casey Report.

Time to Plan

Deferred annuities, cash value life insurance and retirement plans – these are the ready vehicles for protecting the purchasing power of the cash you need for portfolio safety during times of rapid inflation. They do the job by reinvesting money market yields, which tend strongly to track inflation rates, without loss to current tax.

Of course, the three alternatives aren’t exclusive; you can use more than one. Which of them would be best for you depends not just on their characteristics but on your individual circumstances. Now, before CPI inflation starts making double-digit headlines, is a good time to start weighing your choices. Even if you don’t like any of the choices, any of them will be better than letting your cash rot.

Contributing Editor Terry Coxon is president of Passport Financial, Inc., and for over 30 years has advised clients on legal ways to internationalize their assets to optimize tax, wealth protection and estate planning goals.

[For a very limited time, you can now profit from the investment advice of both the Casey Research team and 35 big-name experts… like ShadowStats’ John Williams, James G. Rickards, Chris Whalen, Mike Maloney and many others. Get your Double-Dip Crisis Bundle today – for one low price. More info here.]

How The US Military Affects Your Investments

Soldiering on: Why Our Military Adventures Matter to Investors

By David Galland, The Casey Report

us-military-and-how-it-affects-your-investmentsRecently, I read a book titled The Good Soldiers that also serves as an object lesson in the disconnect between what’s going on in Washington D.C. and reality. It was written by David Finkel, a Pulitzer-winning author, and it came to me via a friend who is going through a stage where she feels drawn to books about war, mostly about World War II. Showing flexibility, her interest has expanded to the ongoing conflict in Iraq – the theater of operations that serves as backdrop for The Good Soldiers.

Despite it going solidly against my literary preferences, I dragged the book along during a quick trip to Florida – a spur-of-the-moment thing to attend a golf school (I figured it was either that or get thrown off the local course for energetic exclamations of elaborate expletives resulting from my golf shots constantly flying off in unexpected and unwelcomed directions). Out of courtesy if nothing else, I figured I’d read a few pages of the book before putting it down – and so was surprised when it sucked me in, and kept me in, pretty much until I was finished.

The background story is that the author of the book traveled to Iraq with a battalion of U.S. soldiers sent as part of the “surge,” then lived with them for the 14 months of their deployment. As far as I can tell, he approached his topic with no overt political intentions – rather, he just wanted to document the war as experienced by a battalion operating from a small base in one of the worst corners of Baghdad.

As one might expect, as they departed from the United States for Baghdad, the soldiers and their brigade commander, Col. Ralph Kauzlarich, were full of fight, patriotism, and the confidence that only a chosen people can possess. It was, in their view, a just war and they deeply believed that in no time at all they’d use their superior war-making capabilities – supported by the sure knowledge that they held the moral high ground – to clean the bad guys out of Dodge and get the whole mess straightened out pronto.

Reality, however, turned out to be significantly different, starting with the fact that rather than being welcoming, the population was overtly hostile – so much so that almost every time the soldiers drove off the base (which was part of the daily routine), the locals would try to maim and kill them. And they had considerable success at it.

In addition to trying to kill them, the community’s leaders seemed uninterested in the outreach efforts the colonel was instructed to make, including an initiative to rebuild the sewers and fix the power and water delivery systems in the area around his command. Of course, it didn’t help that it was the blunt-force approach used by the U.S. military in capturing Baghdad that destroyed so much of the infrastructure in the first place. Regardless, all attempts at doing “good works” were stalled and disappointed at every turn, with billions of dollars wasted in the process.

As the book progresses, the author juxtaposes President Bush’s and General Petraeus’ rosy comments about how well the surge is working with the on-the-ground realities. And those realities are presented as raw and graphic as they are – with the tops of soldiers’ heads being taken off by IEDs, or burning to death in Humvees while friends watch helplessly.

So successful was the military and political leadership in convincing Congress and the media that the surge was a winning strategy that, to this day, its acceptance as a fact has become a meme throughout the body politic. Back on the ground in Iraq, however, the daily grinding down of the front-line forces continues apace.

During the period of time covered in The Good Soldiers, the Iraqi insurgent attacks lightened up only slightly – but only because the ruling mullah in the battalion’s area of operation unilaterally called a cease-fire. The resulting dialing-back of attacks on U.S. forces was immediately pounced upon by the military leadership and the Bush administration as proof that the surge was working.

That that wasn’t the case became clear the day the same mullah called off his cease-fire and hell opened up. One minute the area was relatively quiet – the next, the streets were filled with armed gunmen and snipers, and bombs were going off on what seemed like every corner.

One of the more remarkable aspects of the war, an aspect that largely goes unreported, was just how sophisticated the Iraqi opposition became in their attacks against the occupying forces. Not only did their roadside bombs become murderously powerful – so powerful that they could almost evaporate a fully armored Humvee – but the Iraqis began attacking the U.S. bases using everything from mortars to rockets and even homemade missiles.

The lob bomb, for example, was created out of propane tanks, filled with ball bearings and shrapnel, with a triggering device welded to the nose, and a rocket on the rear. In one instance, two large dump trucks drove near the base; after tilting up their backs to drop their loads, they revealed rails which were then used to guide a barrage of lob bombs, resulting in millions of dollars of damage to the American base.

By the end of the battalion’s stay, the soldiers were mentally and, in many cases, physically ruined. One chapter near the end of the book, which recounted Col. Kauzlarich’s visits to some of his wounded soldiers back in the States – soldiers who suffered truly catastrophic injuries – I had to skip after just a couple of pages. It was just too painful to read.

Lessons from The Good Soldiers

There are a number of important lessons that can be derived from The Good Soldiers, including:

  • The on-the-ground commanders and soldiers being sent into places like Iraq and Afghanistan have only the best of intentions. Though their reasons for joining up may vary, as they head off for war, most believe their leaders wouldn’t deploy them unless there was good reason to do so. Thus when it becomes clear to them just how ill-used they have been – that they have lost friends and limbs for no discernable purpose – it creates a deep sense of disillusionment. The odds of another Timothy McVeigh emerging from the crowd of returning vets are very high.
  • Despite the U.S. government spending tens of millions of dollars a day in Iraq – with the total spent now approaching $1 trillion – the mission has accomplished nothing other than antagonizing the Iraqis whose doors the U.S. troops kick down regularly. When I say “accomplished nothing,” that is actually an overstatement. In fact, other than toppling Saddam, the outcome of the mission has been to create an everlasting antipathy between many Iraqis and the United States, blowing wind into the sails of the most radical elements of Iraqi society. What a mess.
  • The U.S. occupation has turned into a very effective laboratory for the insurgents. At the beginning of the conflict, the resistance fighters were relatively weak – but as time has gone by, the natural ability of humans to adapt and improvise has led to the development of an array of inexpensive but seriously lethal antipersonnel weaponry. That these technologies are now spreading throughout the region can be seen in the recent death of eight U.S. soldiers in Afghanistan, in a single blast.
  • Short of staging a scorched-earth form of warfare – turning these cities into parking lots – the U.S. cannot possibly ever win one of these conflicts. There is no fixed enemy that the U.S. can target with its superior weapons. And it’s unrealistic that the military can hunt down all of the opposition by going door to door.
  • The U.S. political and military leadership is straight out lying to its troops and to the public at large. It is hard to comprehend why, but I dare you to read The Good Soldiers and come away with any other conclusion. Maybe they continue the tragic farce because to cut and run – as we ultimately did in Vietnam – is just too embarrassing. Maybe it’s because they are so effectively lobbied by the war profiteers – may they eventually rot in the hottest corner of hell. Maybe it’s because they are allowed to wage war from a safe distance (no politicians visited the forward operating base where Kauzlarich and his battalion were based during their stay there, and Petraeus only made a single, quick stopover).Meanwhile, the U.S. continues to bleed billions in these misguided wars, while the soldiers just bleed.

Someone, and probably a lot of people, should be held accountable for this travesty – as in being brought up on serious charges and, if found to have propagated lies resulting in the loss of lives and the wasting of hundreds of billions of dollars, sent to jail for a very, very long time. Or, better still, turned over to the Iraqis to punish. I’m sure they’d figure out something appropriately medieval.

Why This Is Important to Us as Investors

Given the urgency of addressing the U.S. debt and deficits, the bloated U.S. military budget is clearly the most obvious place to start making cuts that will actually matter. Yet Congress made no such cuts when passing the $690 billion budget requested by the Defense Department – doing so last week by an overwhelming margin.

That budget includes another $119 billion to flush down the toilets of Iraq and Afghanistan. Showing that it has learned no lessons, the Obama administration – encouraged no doubt by new friends in the military-industrial complex – has already managed to spend $750 million in the undeclared war on Libya.

There is a way to use this understanding that the bankrupt U.S. and its allies are doing little more than breaking furniture and making enemies in the Middle East to one’s advantage. Simply, unless and until the U.S. politicians muster enough spine to pull out of Iraq and Afghanistan and slash the military budget, the government’s massive budget deficits will continue.

And if the budget deficits continue, then the trend for the U.S. dollar is sharply downward (though I remain convinced we’ll see a rally in the near term, a topic we’ll be tackling in greater detail in the upcoming edition of The Casey Report).

That is not conjecture, but the unavoidable conclusion uncovered by a number of objective analyses done on past sovereign debt crises by folks such as Kenneth Rogoff and Casey’s Chief Economist Bud Conrad.

To those readers who think that cutting the military budget, or pulling out wholesale from the Middle East, will increase threats to the continental United States, we will have to agree to disagree. In my view, destroying our economy to wage war – in the process squandering the huge commercial advantage of providing the world its reserve currency – is far more destabilizing. As is making yet more enemies by continuing to lob bombs and kick in doors here, there, and everywhere.

Unfortunately, the U.S. leadership and, I guess, some significant swath of the voting public who supports that leadership are suffering from some sort of mass psychosis (or maybe it’s paranoia), that actually has them thinking that it is somehow in the country’s interest to continue flinging billions of dollars and the lives of its good soldiers into lost causes overseas.

But don’t take my word on the topic – do yourself a favor and pick up a copy of The Good Soldiers today. As I can’t know where you stand on these wars, I can’t say whether or not reading the book will change your mind. But I can guarantee you that its on-the-ground perspective will enlighten you as to the true and disturbing nature of what’s really going on, and the futility of it all. It is anything but entertaining, but is very well written and very illuminating.

Meanwhile, use the military budget as a proxy for the seriousness (or lack thereof) of the government’s intent to reduce its spending by any significant amount. And, absent any serious cuts in that spending, continue to take measures to protect yourself against wholesale debasement of the currency.

Every month, David Galland and his co-editors – among them Doug Casey – of The Casey Report research and analyze significant events in the U.S. and global economy, as well as in politics and the markets. Their goal is to recognize the trends in the making that will directly or indirectly affect investors… and to provide the best profit opportunities, even in a time of crisis. Learn how you can outpace rampant inflation by crisis-investing like the pros in this free report.

Silver Correction And What It Means

By David Galland, Managing Director, Casey Research

Today I’d like to share a couple of thoughts on the matter of the correction in commodities about which we have been so vocally warning, and which has now occurred.

After having written in early April about the possible market response to the end of QE2, specifically about it knocking the legs out from under the overbought precious metals and other commodities, the metals continued higher, causing some readers to express concern that we had led them astray. And any number of analysts opined that the market had already priced in the end of QE2 and thus, even after Bernanke’s press conference, had decided it was go, go, go for higher commodity prices.

Yet, I think it is always a mistake to credit “the market” with any real predictive value. Reactive, yes. Predictive, no. Benjamin Graham had it right when he first penned the profile of Mr. Market as being a maniac, as likely to overpay for an asset as he is to sell too soon.

Put another way, if Mr. Market were actually in possession of a crystal ball, then gold would already be at $2,000 and silver at $75, and higher – because that’s where the underlying fundamentals of the economy will eventually drive them. Just not quite yet.

So, what do I think about the current sell-off? First off, it was way overdue, and anyone who wasn’t leveraged to the wrong side of the sell-off and who had built some cash should be thrilled that it has happened.

Silver, in particular, has been hammered – down over 30% at one point. Now that’s what I call a proper correction. Is it safe to go back into the water? I have to believe that the speed and depth of the sell-off makes it all the more likely that we’ll see a pretty quick bounce back.

While no one can know when, or perhaps because no one can know when (and we still have yet to see the actual economic consequences of the end of QE2), my suggestion would be to start buying in weekly or bi-monthly tranches of somewhere between 25% and 33% of the total cash you intend to reinvest in the metals and related investments. Already, the metals appear to stage something of a comeback, but that doesn’t mean it’s all blue sky from here.

By buying in tranches, you might not hit the exact bottom – but trying to hit the bottom is a fool’s game.

If you didn’t raise cash as the metals spiked higher over the month of April, or even paid up for gold, silver etc., don’t kick yourself (unless you were leveraged to the upside, in which case I can only empathize and wish you luck). Even if you paid $50 an ounce for your last ounce of silver, you will come out just fine in the end, because the monetary system of the U.S., and the world, is corrupt and degraded beyond redemption. It will falter and likely fail, and in time everyone will be scrambling to pick up their precious metals at substantially higher prices.

We’ll have more on this topic, and on what the future holds, in the brand-new edition of The Casey Report, which will be released this week. Renowned financial experts like John Williams of ShadowStats, James G. Rickards, Mike Maloney and others give their take on what to watch for. You can read it fresh off the press with your risk-free 3-month trial, with full money-back guarantee.

Federal Reserve Major Policy Shift Ahead

The Casey Report’s David Galland: Major Policy Shift Ahead

(Interviewed by Louis James, Editor, International Speculator)

federal-reserve-policy-shiftEditor’s Note: David Galland, Casey Research partner and managing editor of The Casey Report, sees a major shift in Federal Reserve policy ahead and has advice on how to invest accordingly. Time is short, so we’ve asked David to share his thoughts with us.

L: David, in recent editorials you’ve warned of what could be an important shift in Fed policy – can you fill us in?

David: Sure. The purpose of The Casey Report is to keep subscribers well positioned in powerful, long-term trends – the kind of trend that will keep giving and giving. The trend in precious metals – gold and silver – which we’ve been heavily recommending for ten years is a good example. The overarching goal of The Casey Report is first and foremost to identify those critical larger trends and then closely monitor them until they play out – which is another way of saying that we aren’t big about market timing or jumping in and out of trades. I mention this to set the context for the coming shift in Fed policy.

L: And that context is?

David: That the shift, and it is imminent, will not change the larger trend, but it has the potential to be quite disruptive over the short term.

L: Explain.

David: In terms of the larger trends, the fundamentals that have caused so much pain and economic woe over the last ten years or so remain intact. If anything, they’ve gotten worse. We’ve gotten currency debasement, not just in the U.S., but especially in the U.S. dollar, which is not just any currency, but the world’s reserve currency.

We’ve got a truly mind-boggling expansion of the reach of government into all aspects of society and the economy, with all that that implies in terms of regulation, taxation, controls over investments and finance, impact on personal liberty, and so forth. By recognizing this destructive trend for what it is, investors can position themselves to avoid the worst, and to profit by betting on things like the continuing debasement of the dollar.

So that’s the big picture.

There is growing evidence that in the next month or two, we will head into a very dangerous period. The Fed has been extremely supportive of the U.S. government’s insane spending, polluting its own balance sheet by buying up toxic loans by the hundreds of billions and by pumping enormous quantities of cash into the money supply.

You don’t have to look very hard to understand why we have seen some small recovery in the economy, much of which has been driven by the financial sector that has been the recipient of so much largess – it was bought and paid for by the government, working hand in glove with the Fed.

But there is about to be a fundamental change in this arrangement. It appears that the Fed has decided that it’s time to take a step back from its monetization – or quantitative easing (QE), as they now term it – in the hopes that the market will step in to fill the large gap it will leave.

They can’t know how that’s going to work out, but if they don’t stop pumping money into the economy, they never will know if the quantitative easing has worked.

Based on a lot of statements from a number of the voting members of the Federal Open Market Committee, the change just ahead is that they are serious about stopping QE in June.

As they won’t wait until the last minute to confirm the end of their Treasury buying, I would expect their intentions to be made clear following their end-of-April meeting, the full minutes of which should be released in early May.

L: To be clear, do you mean no QE3, or that they cancel the portion of QE2 they haven’t spent yet?

David: They may leave themselves a bit of wiggle room by holding back some of the funds slated to be spent as part of QE2, in the hopes of demonstrating a high level of confidence in their decision to stop the monetization.

That would also give them a bit of powder to use should the need suddenly arise, without exceeding the mandate of QE2. The important point is that I am increasingly sure they won’t just roll out QE3, and that will have consequences.

L: Are you saying, no QE3 at all?

David: No. I think there will be a QE3, but it won’t materialize until after a relatively lengthy period during which the Fed stands aside in order to give the market the opportunity to adapt and adjust to their exit from the Treasury auctions. In other words, once they stop, I wouldn’t anticipate them jumping right back in at the first sign of trouble – say, if the stock market crashes.

In time, however, as the ponderous problems weighing on the economy come back to the fore and return the economy to its knees, the Fed will be forced to reinstitute the monetization, though they will likely try to come up with a moniker other than quantitative easing to describe it.

L: You’re as cheerful as Doug. Why are you so sure there will be a QE3?

David: Because the problems that made the economy stumble in 2008 have not been solved. As I said before, most have gotten worse. Have the impossible levels of sovereign debt and trillions in unresolved bad mortgages embedded in the balance sheets of Fannie, Freddie, the Zombie Banks and even the Fed been resolved? Hardly.

Is there any real sign coming out of Washington that the deficits will be substantively tackled? You don’t have to be as active a skeptic as I to understand that the deepest spending cuts being discussed don’t even scratch the surface of the $1.5 to $2 trillion deficit. As for the $60 trillion or so in debt and unfunded obligations, forget about it.

The U.S. government and the governments of most large nation-states are fundamentally bankrupt. In time, they will have to default on their obligations. While there will be some overt defaults, I expect most of them to follow the path of least resistance, which is to try to inflate the problem away. And that means QE3.

For now, however, the Fed will claim victory over the economic crisis and follow suit with many other central banks – switching to a less accommodative monetary policy.

L: They’ve done their job and now it’s time for back-slapping and cigars.

David: Yes.

L: Consequences?

David: If you look at a chart of the dollar, you’ll see that it has been bumping along the bottom recently. Logically, if the Fed stops monetizing the Treasury’s spending, we should see a rebound in the dollar. The big traders – the big institutional money out there – are going to use the change in Fed policy as a clear signal that it’s safe to get back in the U.S. dollar.

It would be wrong to underestimate the amount of money that needs to find a home, and the liquidity advantages offered by the U.S. Treasury market. If the river of money redirects into Treasuries, it could – at least for a time – offset the Fed’s exit and push the dollar up, maybe significantly so. And if the dollar comes roaring back, commodities, including gold and silver, would likely take a fairly hard hit.

Again, this is a short-term view. The longer-term trend for the precious metals is absolutely intact, because the fundamentals are entrenched – namely that the sovereign debt and spending is out of control, and politically uncontrollable.

L: Let’s talk about that for a moment. These people – the big money – are financial types. Bankers. They know about all the bad debt they have, even if the ever-so-convenient new reporting rules allow them to keep some of their problems off the books. They must know that a so-called jobless recovery is not a recovery.

They are well aware of all sorts of dirt they don’t discuss in public – how could they be stupid enough to let the Fed convince them the economy is healthy when their own information tells them it isn’t?

David: First off, “they” are not one guy. They are a lot of people with a lot of different perspectives and a lot of different objectives. Right now, for example, people look at the lack of yields in bonds and the potential for inflation in bonds, so they’ve been easing back on bonds and getting into equities more, in the hope of generating some kind of return.

If you’re a fund manager or a large institutional trader, you’re not paid to sit on your hands. You’ve got to “do something,” even though there are times – and I think this is one of those times – when doing nothing is exactly the right thing to do. So, I wouldn’t say they are being stupid–

L: Doug would: “An unwitting tendency toward self-destruction.”

David: Yes, he would – but these guys are not stupid; it’s rather that they’ve made their own calculations and concluded that U.S. equities are still safe – a position that is supported by the very low levels of volatility. Even the troubled financials have seen strong gains of late, even though nothing has been fixed. Of course, if you look under the hood, you find they’ve benefited substantially from the cheap money and rigged deals the government has orchestrated to bail them out.

While no one can say when the shift out of equities and back into Treasuries and lower-risk assets will begin, in my view the Fed’s exit from quantitative easing sets the stage for that to happen. After that, it will just be a matter of time before traders are going to wake up and decide equities are not safe, and they’ll start leaving in droves.

Remember, however, that the stock market and the economy are by nature very complex systems. There are so many variables, you just can’t know which variable is going to rule the day at any given time. But given the importance of the Fed’s intervention and the government spending that has helped engender, its policy shift is certainly a variable to keep an eye on.

L: I find the capacity of bankrupt financial companies to defy gravity truly amazing. Disbelief sustained for such lengths of time makes me dizzy.

David: You’re not alone. The vast ocean of bad debt out there is just as big as ever. Everything I hear from people in the financial industry is that the banks’ debt profiles are not getting any better. People are not getting on top of their debts. They are not paying down their mortgages. Default rates are still astronomical…

L: How could it be otherwise? Unemployment is still high.

David: Unemployment is still stubbornly very high, though if you buy into the government’s figures, it is moving steadily in the right direction. Of course, the government has no reservations about jiggering the data to suit itself. That makes it important – if you want to get a more realistic picture – to look at the topic from different angles.

One telling statistic is unemployment as a percentage of the employable population, which screens out many of the government’s self-serving adjustments to its official figures. Looked at that way, you can see that unemployment is continuing to rise, even though the government is reporting that it’s falling markedly.

L: No! You can’t be suggesting good old Uncle Sam would lie to us…

David: You could say we have another deficit, one in government accountability. Clearly, it’s very politically important that unemployment be perceived as declining, therefore, voilà, it is.

L: “Alas, Bartleby.” Okay, let’s back up a bit to the debasement of the dollar. You mentioned that as a given, almost in passing, but there are a lot of people who don’t see it. Inflation is low, Uncle Sam assures us, so the dollar has not been debased. Q.E.D.

David: Well, anyone who can see beyond the tip of their nose can see that inflation is going up. Just pull up a chart of the CRB Index for commodities – the real stuff required for life – and one can see it has been on a steep upwards trajectory. Inflation is very much here and alive.

L: John Williams’ Shadow Stats chart shows inflation at nearly 10%, while the Bureau of Labor Statistics is reporting 2.1%.

But even Williams’ statistics don’t report real inflation; they just report what it would be if the government reported inflation the way it used to, before it started “improving” its reporting in the 1980s. It’s still an incomplete view, because the government’s original reporting was flawed to begin with.

David: Right. And one of those flaws is the way they weigh housing. It plays a big, big role in CPI, and in 2008 housing was dealt, if not a death blow, at least a blow that put it in the hospital. And it will be there for a very long time, because government policies encouraged bad decisions on the part of both lenders and borrowers. This has left trillions of dollars of bad debt hanging out there.

The retracement of housing prices, as a component of official CPI, pulls the official inflation figures down, even though those figures don’t sync up with the actual cost of living. Of course, a low CPI gives the government cover for continuing to monetize its debt.

Inflation problem? What inflation problem?

L: The net of this for inflation is that the crushing of the housing sector makes the CPI drop, making it look like life is getting cheaper, whereas the reality is that people’s hard-earned wealth put into real property has taken a beating at the same time as the things they consume on a daily basis cost more. Life has gotten a lot more expensive even as savings have been wiped out. Not good.

David: Right. And the government is trying to get people to ignore the signs of inflation, saying everything is all right. But recently, several Fed governors have been saying outright that there is a problem and that they need to cool off the money creation and start dealing with inflation. This is why I think there isn’t going to be an immediate QE3.

L: So, what happens next?

David: Consider Japan as an example of an advanced economy that has been struggling to deal with the aftereffects of a collapsed bubble in real estate and stocks for many years – well before the recent earthquake.

If you look at what happened when they did their equivalent of QE after the initial stock market crash, the spending stimulated a fairly significant recovery in Japanese equities, taking the market back up about halfway to the bubble’s top; but the rally didn’t last.

Once the Japanese government put an end to its quantitative easing, the Nikkei plummeted. The government resisted reinstating quantitative easing for two years before throwing in the towel and once again cranking up the money engines in an attempt to break the economy out of the doldrums.

The long-term result is a Nikkei still well below the crash level (even before the earthquake), and all the spending has caused Japanese government debt to rise to 200% of GDP. While no two situations are identical, I think the U.S. is following a very similar script.

L: If the Fed decided to hold off on QE3, do you think it could take as long as two years for them to feel forced back to it, forced to do something?

David: It could. It would depend on how sharp the downtick is. There are so many factors at work here that it’s really unknowable at this point. Nearer-term, all the signals are that the Fed will hold off on QE3 at their next meeting. And, as I have tried to make clear, that will have consequences – for equities, for the dollar, for the commodities sector.

L: Can you give those readers not familiar with The Casey Report some reason to believe your crystal-ball gazing? What’s your track record with these sorts of predictions?

David: Well before the current financial storm hit, we were forecasting that the Fed would begin monetizing the government’s debt, and we were writing about a credit crisis leading to a currency crisis, which is exactly what’s happened. We absolutely nailed it, and our subscribers made a lot of money on some of our recommendations – and safeguarded a lot of their wealth with others.

L: That’s true, though back then, before The Casey Report separated out the big-picture writing from the International Speculator our portfolio did take a temporary beating – along with everything else at the end of 2008.

David: Yes, but everything we said about the debasement of the dollar and its consequences for gold was borne out. Further, we made a bold move, counseling people to go a third in gold and gold-related assets, a third in cash, and a third in other assets that could do well in an economic crisis. Subscribers who actually followed this allocation suffered very little in 2008.

L: Isn’t it a bit contradictory to recommend that people keep 33% of their wealth in cash, if you think the dollar is being destroyed?

David: The dollar is being destroyed, as one can see by how much gold, oil, wheat, cotton or any other number of things one can buy with it. However, while it’s not dropping day to day and the markets remain extremely volatile, cash is not a bad thing to hold – especially in relatively safer currencies, like the Canadian dollar and the Norwegian krone.

So, again, the big trends remain intact. Our question now is what’s going to happen next, in the short term. And in that context, the Fed’s switch in policy is a big deal. When you go from the Fed showing up every week and buying Treasuries, to the Fed stepping back and saying “No more,” it can send major shock waves through the economy.

L: So, if the Fed does what you think it will, by June, how do readers invest accordingly?

David: [Laughs] This may not be a popular answer, but I think the correct answer is that the best thing you can do in the near term is to increase your cash position. I would be very cautious about moving into any other asset class at this point, including gold.

L: You wound me.

David: I know. Listen, if you own high-quality gold stocks, such as those you recommend in the International Speculator – companies that have the goods and can weather the coming storm – you can certainly just ride right through what’s coming. But if you’re not quite confident enough to avoid panic selling in a correction, or if you have some mutts in your portfolio that haven’t performed and you’re not sure why you own them, I’d get rid of them fairly quickly.

Remember: the time line on the Fed’s decision is quite near-term. That doesn’t necessarily mean there would be an immediate stock market crash, but it certainly would have an effect on the commodities sector.

On the other hand, as I’ve said, markets are complex. Saudi Arabia could go up in flames, sending oil and gold both way up. So I’m not telling anyone to get out of the markets. There’s no way to predict such events – but what we do feel confident about predicting is that the Fed will not roll right into QE3.

L: Agreed. And if you’re wrong, having cash to deploy into new opportunities won’t be a bad thing. Anything else?

David: If you’re of a mind to play in the currency markets, you could take a leverage bet on the dollar rising against competitive currencies. But right now, personally, I’m inclined to do nothing, except maybe to lighten up on some investments and go to cash.

That sets you up for the real play. If I’m right, and commodities – including precious metals – sell off, and mining stocks sell off even more, there will be some fantastic opportunities to take advantage of. The people who are paying attention will be able to clean up.

L: Now you’re singing my song: short-term cash, and get your shopping list ready.

David: That’s the way I see it.

L: Okay then, thanks for your predictions – I look forward to seeing how they bear out.

David: It was fun. We should do this again sometime.

L: I’m sure Doug won’t mind, especially when you get a strong sense of where the markets are going, like this one.

David: Until next time, then.


[David Galland is one of the editors of The Casey Report – a monthly advisory analyzing big-picture trends that every investor needs to know about. Try a one-year subscription today for 20% off the retail price… plus 3-month money-back guarantee. And don’t forget to sign up for FREE to have “Conversations with Casey” delivered to your inbox every Wednesday.]

Is Ben Bernanke Really Stupid?

helicopter-ben-bernanke-is-stupidSimple Question, is Ben Bernanke really as stupid as his actions would deem one to think?

Read this post below for your answer and decide for yourself just how much of an idiot helicopter Ben really is (and how stupid Obama and the Congress might be for allowing his charade to continue):

Bernanke, You Stupid Bastard

There, you read it there today, but if you had been reading The Casey Report then nothing in that column would surprise you AND you would be PROFITING from the disaster as it unfolds.

An Investment Newsletter You Cannot Afford NOT to Read

Please Note: In the cartoon above, Helicopter Ben Bernanke is only throwing money out over the top of Wall Street and his favorite Wall Street banking crook friends.

How To Invest – Make Money And Sleep At Night

David Galland from Casey Research had the following thoughts in his Friday “Daily Dispatch” regarding how to invest such that you not only make money, but also that you are able to sleep at night.

While this sounds somewhat rudimentary and even a bit cliche, let me assure you that many investors do NOT sleep at night as a result of the investment decisions they have made.

Once you start making investment decisions that do NOT allow you to sleep at night you will probably spiral down a ensnaring trap of poor decision making brought on by panic that will result in massive investment losses.

So with that said, let’s take a look at what Mr. Galland has to say, I will enclose occasional comments of my own in [square brackets]:

Based on my many interactions with investors over the years, I have concluded that there are really just two sorts [of investors]. There are those that have clear goals, and those who don’t. Those who do make the money. Those who don’t provide the money to those who do (investing in a zero-sum game – for every winner, there is a loser).

This thought was made more tangible to me in recent days, based on a personal experience. Long story short, I had invested in a pre-public company years ago. It wasn’t a big investment, and it took longer than anticipated to ultimately go public. When it did, it had a fairly good run, but as the reason I bought it in the first place was still ahead of it, I hung on. Well, as is so often the case, the company’s missed a hurdle and came tumbling back to earth. With the stock trading hardly at all, and for just a few pennies a share.

Lo and behold, the company’s management reinvented the company as targeting rare earths and managed to acquire a project of merit. The investment that I had written off as worthless soared on high volume.

Now, if there is one thing that anyone with experience in the small-cap resource stocks will tell you, is that the time to sell is when there is someone to sell to – because absent volume, getting out of a decent-sized position is not easy.

So, there was the dilemma – hold on in the hope that the surprise home run turns into the sort you bestow on your grandchildren? Or secure your gains by selling and moving on?

At the point of such a decision, the mind gets very un-Zen-like. Visions of untold riches dance in the head, followed by fits of fretting as the stock pulls back. Next thing you know, you are tossing and turning in the night, conflicting thoughts chasing each other around like cats.

In the final analysis, I recalled the old adage that pigs get fat but hogs get slaughtered [this is a saying that I learned way back in my retail brokerage days and have never forgotten]. I sold enough to take my initial investment off the table [we call this a “Casey Free Ride”], and a healthy profit – holding on to a modest position to enjoy any further upside. And, having done so, the internal dialogue came to an abrupt halt.

Now, the funny thing is that after a brief pause, the company is again moving up – but I have no intention of second guessing my decision to sell when I did. On a percentage basis, my returns were in the moon shot category – the sort that only the junior resource sector can produce – so it would be just plain churlish to gripe.

More to the point, the stock could just as easily have peaked and once again collapsed, in which case I would really feel like a dolt had I not taken an exit.

All of which delivers me to the point. Namely that it is very important, especially for the resource investors among you, that you actually have a firm goal in mind for each investment you make – and that you remain single-mindedly focused on that goal.

Investing in Gold and Silver?

Do you own gold or silver as a protection against inflation? If so, then why even bother checking the price on a daily basis, let alone every few minutes?

Or do you own it as a speculation? If so, what is your specific profit target? Don’t have one? If not, then it seems to me a bit like setting off on a journey without knowing where you want to actually go.

Do you know exactly why you own the resource stocks you do? What hurdle are you betting they will clear next, and by doing so ratchet the price higher? Is your goal to get your original investment off the table on a double? Or do you have a specific price target in mind, at which point you will close the position entirely and move on to more fertile ground?

This idea of keeping an easily understood, single goal in mind for each of your investments is hugely important, because without it you are going to be susceptible to the fears, fantasies, and folly that ultimately cause investors to end up on the losing side of the equation… by selling good companies on pullbacks, holding on to positions well past the point of reasonableness or chasing stocks after they’ve spiked.

Probably the most successful investor I know – I won’t say his name, because he might not like my pointing out that he has tucked away close to a billion dollars [no, unfortunately, it’s NOT me – LOL!], thanks primarily through investments in the resource sector – has a well-deserved reputation for selling too early.

While it is remarkable that he has made so much money in this sector, what is more remarkable is how he did it. Which I would sum up as follows…

  • First and foremost, he follows a process – almost mechanically.
  • He buys low, with a specific objective in mind. Both in terms of hurdles he expects the company to clear, but also in terms of the returns he expects to get on his investment.
  • When his return objectives are met, he sells. Maybe enough to get his original investment off the table, maybe the entire position – depending on his reassessment of the company’s potential to clear the next hurdle. But he always sells at least enough to get his original investment off the table, no matter how much exciting news there is and how much optimism others may feel about the stock.
  • He only buys on his own terms. If invited to participate in a private placement, he will do so only if he is completely comfortable with the terms. If the company is offering a warrant with a one-year expiration term and he thinks the development work will take two years, he’ll ask for a two-year warrant. If the company won’t budge, he moves on, confident in the knowledge that there will always be another deal coming down the pike.
  • He’s careful with his money. As he likes to say, if you spend your dollars, they can’t mate and make you more dollars.
  • He’s not afraid to concentrate investments, but again on his terms, and only when he has done the due diligence needed to be confident that the potential reward warrants the level of risk involved.

If those principles and practices sound simple, it is because they are. But following that process is also incredibly effective.

Interestingly, this process rhymes with the finely honed investment methodologies of the late great Benjamin Graham, author of The Intelligent Investor and mentor to a small cadre of close associates that included Warren Buffett, Jean-Marie Eveillard, William Ruane and Irving Kahn – all of whom used what they learned from Graham to become billionaires, or close to it.

Let that sink in for a moment. One man, Graham, developed a methodology for investing – and it’s actually a pretty simple methodology – that the people working with him were able to duplicate in building their own fortunes. Following a proven process works.

And while Graham wouldn’t have touched a junior resource stock with a twenty-foot pole – his methodology was focused on balance sheet analysis, not a strong point for junior exploration stocks that have no E in their P/E – the principle of following a specific process that mitigates the odds of a loss holds up well. The proof in the pudding is the success of my aforementioned friend, and many others I know who are similarly disciplined. (Our own Marin Katusa, to name just one.)

With all of that said, do you know why you own what you own? Do you have a clear goal in mind for each of your positions? Do you know how much of your portfolio is allocated to speculative resource plays, and are you comfortable with the idea that those stocks have historically suffered extreme sell-offs?

Warren Buffett, whose investment acumen is hard to argue with [even though I don’t like his politics much and wish he would just write his own check to the US Treasury rather than influence estate taxes for the rest of us], likes to quip that the two most important rules for investment success are, Rule #1 – Never lose money. Rule #2 – Never forget rule No. 1.

While it is almost impossible not to lose money along the way while investing in resource shares, it is equally true that once you have scraped your original investment off the table, it is impossible to lose money. Sure, you can give back your profits – but you can’t lose money.

Back to me, now, Thanks David!

This is the kind of investment insight that can make the difference between whether you make money investing or lose money investing.

Which type of person do you want to be, the loser who provides the profits to the winner? No, I thought not.

If you would rather know how to invest such that you can make money AND sleep at night, then you should consider a risk free trial subscription to The Casey Report, learn more here.